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Retirement Savings

The Value of Multiple Retirement Income Streams

Retirement planning was historically a little easier. For instance, the average life expectancy in 1950 was 68 years old.1 If you retired at age 62, your retirement plan might need only six years of retirement income. Additionally, with the decline of defined benefit pension plans, only 14% of private industry employees receive a pension today.2

Since more people are responsible for deciding how much income to set aside for retirement and how to invest that money, they are falling short compared to the days of employer-sponsored retirement income and shorter life expectancies. In fact, recent studies show that today’s retired baby boomer households without a pension are more likely to deplete their 401(k) savings quickly, which means they are more likely to outlive their savings.3

This is why it is important to look beyond your company-sponsored retirement plan. You can create a mix of tax-advantaged IRAs, a taxable investment portfolio, guaranteed annuity income, life insurance products that build cash value, and even passive income from a work endeavor (royalties, residual income) or rental property. Early in your retirement planning, we can help you consider different options. Even if you can’t afford to fund certain income streams now, it’s a good idea to consider what type of retirement income sources interest you most and work toward those goals. Feel to contact us to discuss multiple retirement income stream strategies.

In fact, the Center for Retirement Research at Boston College found that retirees who receive a higher portion of their income from annuities spend down their savings at a slower rate. Note that for the purposes of this study, annuity income refers to a pension, Social Security or an insurance company annuity.4

In addition to annuity options, investors may want to consider building a laddered bond portfolio and/or laddered certificates of deposit.5 While this plan locks up money for periods of time, it provides the opportunity to augment funds at different stages of retirement and can help you from running out of money. An income stream can be generated by interest and dividends from an investment portfolio comprised of bonds, bond funds, CDs and dividend-paying stocks. This strategy can minimize your risk to principal but does increase your risk exposure to inflation and changing interest rates.6

While Social Security is basically a lifetime annuity, many people have no idea how much payout to expect, especially if they are early in their retirement planning effort. One tool that anyone can use at any age is to register online at my SocialSecurity. You can monitor your personalized retirement benefit estimates and spousal benefit estimates, which change as you move through your career.7

A recent study found that people who use the Social Security website tend to be more educated and financially literate. That’s unfortunate since less-educated, lower-paid workers would probably benefit more from understanding their future benefits.8 However, it’s worth knowing that the website is free and can be very helpful in creating a long-term retirement income strategy.

Macrotrends. 2022. “U.S. Life Expectancy 1950-2022.” https://www.macrotrends.net/countries/USA/united-states/life-expectancy. Accessed March 3, 2022. CNN. 2021. “Just how common are defined benefit plans?” https://money.cnn.com/retirement/guide/pensions_basics.moneymag/index7.htm. Accessed March 3, 2022. 3,4 Center for Retirement Research at Boston College. Feb. 24, 2022. “Retirees with Pensions Slower to Spend 401k.” https://squaredawayblog.bc.edu/squared-away/retirees-with-pensions-slower-to-spend-401k/. Accessed March 3, 2022. Lisa Smith. Investopedia. Sept. 28, 2021. “4 Sources of Income for Your Retirement.” https://www.investopedia.com/articles/retirement/08/retirement-income-stream.asp. Accessed March 3, 2022. Fidelity. 2022. “Retirement income strategies.” https://www.fidelity.com/learning-center/personal-finance/retirement/retirement-income-strategies. Accessed March 3, 2022. Social Security Administration. 2022. “Create your personal my Social Security account today.” https://www.ssa.gov/myaccount/. Accessed March 3, 2022. Center for Retirement Research at Boston College. Feb. 10, 2022. “Workers: Social Security Info is Eye-Opening.” https://squaredawayblog.bc.edu/squared-away/workers-social-security-info-is-eye-opening/. Accessed March 3, 2022.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
 The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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Savings Strategies

Some people have no trouble saving money — they stash away any cash they don’t need, and their account grows and grows. These people usually aren’t very materialistic and don’t have a lot of goals that require money to fulfill. That’s a wonderful trait, in some ways.

However, there’s nothing wrong with setting up specific goals and saving money to achieve them. First of all, many of those goals, such as buying a home or giving your children a college education, are actually investments that can deliver much higher returns. Those returns can be monetary while still being emotionally and intellectually rewarding.

One way to reach those goals is to adapt the mindset of that first saver — the one who doesn’t really want much or feel the need to spend money precipitously. For many of us, that’s an elusive trait. However, those of us who aren’t like that can still reach savings goals by being organized, disciplined and vigilant.

To be organized, you should differentiate between long and short-term goals and determine which type of savings vehicle is most appropriate for each goal. To be disciplined, it’s a good idea to set up an automatic savings plan so that a fixed amount of money is transferred from your checking account to those individual savings accounts on a regular basis, much like paying a monthly bill. And to be vigilant, you should closely monitor both ongoing expenses and ad hoc spending to ensure that you have the assets available to fund those specific goals. These are all financial practices we can help you with, so don’t hesitate to call us.

When saving for a home, car or other short-term goal, consider a high-yield savings account separate from where you do your regular banking. This way, it’s not that quick or easy to transfer funds back to your checking account on a whim. Set it and forget it with automatic transfers so that your account balance continues to grow in the savings account, even if you start small.1 If this is your primary goal, think about putting at least half of any unexpected cash — such as work bonuses, tax refunds, inheritances or other windfalls toward this savings account.

If your next goal is saving for college, it’s good to start young, and it’s fine to start small. One of the strongest components of saving is the simple discipline of the strategy — always be saving, even if you start with just $25 a month. There are a lot of scary articles and news reports about how much it costs to send a child to college (2020–2021 average: $26,820 in-state; $54,880 private), but the key to remember is that you don’t have to save enough to cover 100% of that cost. You will likely be able to combine current household income, scholarships, grants and student and parent loans. For your savings efforts, a 529 plan offers both a tax-deferred investment option and a prepaid plan, depending on your circumstances. The savings portion is good for building an investment balance throughout time, while prepaid is a good option for windfalls — like an inheritance or proceeds from the sale of property.2

Retirement savings are best achieved throughout the long haul. The earlier you start, the more the power of interest compounding works its magic. Most employers offer a 401(k) or similar plan to help you defer income from your paycheck to a retirement account each month. If your employer offers a match, be sure to defer at least enough to take full advantage of the match. This is a strategy even young adults can engage in with their first job. Remember, incorporate monthly saving as a discipline, and you’ll always be able to live on less than you earn.

If you are self-employed or your employer doesn’t offer a retirement plan, consider opening an IRA (or a solo 401(k) plan if/when you earn a substantial income because contribution limits are much higher). A traditional IRA offers a current income tax deduction, while a Roth IRA eliminates taxes when you withdraw assets. If you max out contributions with an employer plan, a Roth IRA is a good option to reduce your tax obligation during retirement. However, you can only contribute to a Roth if your modified adjusted gross income (MAGI) is less than $140,000 (single) or under $208,000 (married couples filing jointly) in 2021.3

Another aspect of retirement that many people do not plan for is retiree health care. Some studies report that a 65-year-old couple may need up to $400,000 to cover this cost in retirement. However, this goal is best treated like saving for college — save some now, but budget for some of that cost from your retirement income. According to an analysis from T. Rowe Price, about 50% of retirees with traditional Medicare (Parts A and B), a prescription drug plan (Part D) and Medigap will spend less than $1,200 a year on out-of-pocket expenses. In contrast, only 10% will spend more than $4,700 a year.4 If you fall into the former category, that $100 a month may be easily covered by your household retirement income. But it’s good to save for the latter scenario over time through some form of liquid savings account to meet those annual out-of-pocket costs.

Kendall Little and Raina He. Time. April 29, 2021. “How to Save For a Down Payment for a House.” https://time.com/nextadvisor/banking/savings/how-to-save-for-a-house/. Accessed Sept. 13, 2021.
2 T. Rowe Price. Fall 2021. “How to Save for College in Uncertain Times.” Page 4. https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine-fall.pdf. Accessed Sept. 13, 2021.
3 T. Rowe Price. Fall 2021. “What’s Your Best Contribution Order?” Page 3. https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine-fall.pdf. Accessed Sept. 13, 2021.
4 T. Rowe Price. Fall 2021. “The True Cost of Health Care in Retirement.” Page 6. https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine-fall.pdf. Accessed Sept. 13, 2021.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
 The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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How Infrastructure Spending Affects Municipal Bonds

According to the American Society of Civil Engineers, the 10-year tab to meet the country’s basic infrastructure needs is about $6 trillion. The report, published in March, includes $125 billion needed for bridge repairs, $435 billion for roads and $176 billion for the nation’s transportation systems.1

For more than 200 years, municipal bonds have been used as public financing instruments in the U.S. Today, two-thirds of infrastructure projects such as schools, hospitals, highways and airports are financed by municipal bonds.2

In addition to providing revenue for infrastructure projects, muni bonds offer an attractive investment opportunity. They provide tax-advantaged yields for current income, stable credit quality and a risk-averse allocation for an investment portfolio. One way to diversify municipal bond investments is through a municipal bond fund or ETF. Given the potential for increased interest and investment in infrastructure in the foreseeable future, we’re happy to discuss opportunities suitable for your portfolio. Give us a call if you’d like to learn more.

President Joe Biden recently proposed a $2.3 trillion plan to invest in the nation’s infrastructure. One funding option Congress may consider is the Build America Bonds (BAB) program, which was introduced during the Great Recession as a means to fund recovery efforts through infrastructure repairs and development. BABs were originally structured for states, cities, schools, airports, mass transit agencies and other public entities to sell for a limited time. They were particularly attractive because the federal government kicked in 35% of interest costs.3

Stimulus packages over the past year have benefited the municipal market by making funds available to state and local governments to make up for lost sales tax revenues due to lockdowns and the beleaguered economy.5 Now, with more revenue available, local public agencies may be inclined to issue debt for capital purposes.

Bonds backed by states and cities tend to have high credit ratings and low default risk, and the federal government underwriting municipal debt makes them even more attractive. Historically, muni bonds have offered rates as high as 7% or more.Furthermore, given the potential that an expensive infrastructure bill may be supported by an increase in income tax rates, municipal bonds offer an opportunity for investors to shield income from taxation.7

1 Thomas Franck. CNBC. March 26, 2021. “Build America Bonds may be key to financing Biden’s infrastructure plans.” https://www.cnbc.com/2021/03/26/build-america-bonds-may-be-key-to-financing-bidens-infrastructure-plans.html. Accessed May 5, 2021.

2 Jenna Ross. Visual Capitalist. Nov. 4, 2019. “From Coast to Coast: How U.S. Muni Bonds Help Build the Nation.” https://www.visualcapitalist.com/municipal-bonds-build-nation/. May 5, 2021.

3 Karen Pierog. Reuters. March 31, 2021. “Build America Bonds may stage a comeback in Biden’s infrastructure plan.” https://www.reuters.com/article/usa-biden-infrastructure-bonds/build-america-bonds-may-stage-a-comeback-in-bidens-infrastructure-plan-idUSL1N2LR1UZ. Accessed May 5, 2021.

5 Sanghamitra Saha. Nasdaq. April 7, 2021. “4 Factors Why Muni Bond ETFs Could Rally.” https://www.nasdaq.com/articles/4-factors-why-muni-bond-etfs-could-rally-2021-04-07. Accessed May 5, 2021.

6 Ibid.

7 Franklin Templeton. March 18, 2021. “Stimulus and Infrastructure: Boon for Muni Bonds?” https://www.franklintempleton.com/investor/tools-and-resources/investor-education/talking-markets-podcast/stimulus-and-infrastructure-boon-for-muni-bonds. Accessed May 5, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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Warren Buffett’s Annual Shareholder Letter

Every year, Berkshire Hathaway’s Chairman and CEO Warren Buffett sends a thoughtfully crafted letter to the company’s shareholders from which the investment industry gleans whatever newfound wisdom possible. Given that 2020 was an unusual year by economic, social and financial standards, there is much to glean.

Despite the difficulties the U.S. has experienced in managing the COVID-19 virus, Buffett has one sustaining message: “Never bet against America.” He also is a man who aligns his money with his beliefs. Presently, Berkshire Hathaway owns the highest value of U.S. business assets – comprised of property, plants and equipment – than any other company in the country.1

Berkshire is a conglomerate of disparate companies, and Buffet spends much time in his letter imparting what he’s learned about being a majority shareholder versus running a business. He says that “owning a non-controlling portion of a wonderful business is more profitable, more enjoyable – and far less work.”2

Fortunately, that’s also what it can be like to be an individual investor. While we may not be major shareholders, investors are often rewarded with a slice of the profit pie when we choose a well-run and profitable business. The key, of course, is to pick the right ones. Short-term investors may look to trade high risk for a quick profit, while longer-term investors may seek more reliable performance and give a company plenty of time to deliver. Sometimes it’s a matter of first figuring out what it is you want to accomplish with the money you make and then develop a strategy from there. Let us know if we can help.

One concept Buffett often reiterates is the need to hold a margin of safety when investing. Millions of people who lost their jobs during the pandemic learned just how narrow that margin of safety was within their own households. For those lucky enough to continue working, they may be even better off than before – simply because the pandemic shut down normal spending activities. That means many households are now in a position to reduce their debt and financial risks, and create an emergency fund they may not have had previously.3

Another hallmark move Buffett made in 2020 was an outsized buyback of Berkshire Hathaway’s own shares. The total 2020 tab came to $24.7 billion – compared to the combined total of $6.4 billion from the two prior years. Buffett noted that while he normally shies away from repurchases, the strategy offered “a simple way for investors to own an ever-expanding portion of exceptional businesses.” The strategy proved to be appropriate for an unpredictable year such as 2020.4

And finally, another key component of the shareholder letter was that Buffett admitted to making a big mistake in the past that came to a head in 2020. In 2016, Berkshire purchased aerospace parts manufacturer Precision Castparts for $37 billion. While he still believes the company is the leader of the aerospace industry and will generate solid returns in the future, Buffett cops to an earnings miscalculation that led him to pay too much for the company. 5

1 Yun Li. CNBC. Feb. 27, 2021. “Warren Buffett says ‘never bet against America’ in letter trumpeting Berkshire’s U.S.-based assets.” https://www.cnbc.com/2021/02/27/warren-buffett-says-never-bet-against-america-in-letter-trumpeting-berkshires-us-based-assets.html. Accessed March 8, 2021.
2 Warren Buffett. Berkshire Hathaway. Feb. 27, 2021. “To the Shareholders of Berkshire Hathaway Inc.” https://www.berkshirehathaway.com/letters/2020ltr.pdf. Accessed March 8, 2021.
3 Chris Farrell. Star Tribune. March 6, 2021. “Take advantage of this rare opportunity to reduce financial risk.” https://www.startribune.com/take-advantage-of-this-rare-opportunity-to-reduce-financial-risk/600031093/?refresh=true. Accessed March 8, 2021.
4 Aparna Narayanan. Investor’s Business Daily. Feb. 27, 2021. “Warren Buffett’s Key Investment Strategy Rests On These ‘Family Jewels’.” https://www.investors.com/news/warren-buffett-annual-letter-signals-maintaining-berkshire-hathaway-strategy-2021/. Accessed March 8, 2021.
5 James Leggate. Fox Business. Feb. 27, 2021. “In Warren Buffett’s annual letter he admits making this ‘big’ mistake.” https://www.foxbusiness.com/markets/warren-buffett-admits-making-this-big-mistake-in-annual-letter-to-investors. Accessed March 8, 2021.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
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Five Tips to Regain Your Retirement Savings Focus in 2021

In early 2020, 61% of U.S. workers surveyed said that retirement planning makes them feel stressed ¹. Investor confidence was continually tested as the year wore on, and it’s likely that this percentage rose — perhaps even substantially. If you find yourself among those feeling stressed heading into the new year, these tips may help you focus and enhance your retirement savings strategy in 2021.

  1. Consider increasing your savings by just 1%. If you participate in a retirement savings plan at work, try to increase your contribution rate by just 1% now, and then again whenever possible until you reach the maximum amount allowed. The accompanying chart illustrates the powerful difference contributing just 1% more each year can make over time.
  2. Review your tax situation. It makes sense to review your retirement savings strategy periodically in light of your current tax situation. That’s because retirement savings plans and IRAs not only help you accumulate savings for the future, they can help lower your income taxes now. Every dollar you contribute to a traditional (non-Roth) retirement savings plan at work reduces the amount of your current taxable income. If neither you nor your spouse is covered by a work-based plan, contributions to a traditional IRA are fully deductible up to annual limits. If you, your spouse, or both of you participate in a work-based plan, your IRA contributions may still be deductible unless your income exceeds certain limits. Note that you will have to pay taxes on contributions and earnings when you withdraw the money. In addition, withdrawals prior to age 59½ may be subject to a 10% penalty tax unless an exception applies.
  3. Rebalance, if necessary. Market turbulence throughout the past year may have caused your target asset allocation to shift toward a more aggressive or conservative profile than is appropriate for your circumstances. If your portfolio is not rebalanced automatically, now might be a good time to see if adjustments need to be made. Typically, there are two ways to rebalance: (1) you can do so quickly by selling securities or shares in the overweighted asset class(es) and shifting the proceeds to the underweighted one(s), or (2) you can rebalance gradually by directing new investments into the underweighted class(es) until the target allocation is reached. Keep in mind that selling investments in a taxable account could result in a tax liability. Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
  4. Revisit your savings goal. When you first started saving in your retirement plan or IRA, you may have estimated how much you might need to accumulate to retire comfortably. If you experienced any major life changes during the past year — for example, a change in job or marital status, an inheritance, or a new family member — you may want to take a fresh look at your overall savings goal as well as the assumptions used to generate it. As circumstances in your life change, your savings strategy will likely evolve as well.

5. Understand all your plan’s features. Work-based retirement savings plans can vary from employer to employer. How familiar are you with your plan’s specific features? Does your employer offer a matching and/or profit-sharing contribution? Do you know how it works? Are company contributions and earnings subject to a vesting schedule (i.e., a waiting period before they become fully yours) and, if so, do you understand the parameters? Does your plan offer loans or hardship withdrawals? Under what circumstances might you access the money? Can you make Roth or after-tax contributions, which can provide a source of tax-free income in retirement? Review your plan’s Summary Plan Description to ensure you take maximum advantage of all your plan has to offer. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

¹ Employee Benefit Research Institute, 2020
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Four Questions on the Roth Five-Year Rule

The Roth “five-year rule” typically refers to when you can take tax-free distributions of earnings from your Roth IRA, Roth 401(k), or other work-based Roth account. The rule states that you must wait five years after making your first contribution, and the distribution must take place after age 59½, when you become disabled, or when your beneficiaries inherit the assets after your death. Roth IRAs (but not workplace plans) also permit up to a $10,000 tax-free withdrawal of earnings after five years for a first-time home purchase.

While this seems straightforward, several nuances may affect your distribution’s tax status. Here are four questions that examine some of them.

1. When does the clock start ticking?

“Five-year rule” is a bit misleading; in some cases, the waiting period may be shorter. The countdown begins on January 1 of the tax year for which you make your first contribution.

Roth by the Numbers
Sources: Investment Company Institute and Plan Sponsor Council of America, 2019

For example, if you open a Roth IRA on December 31, 2020, the clock starts on January 1, 2020, and ends on January 1, 2025 — four years and one day after making your first contribution. Even if you wait until April 15, 2021, to make your contribution for tax year 2020, the clock starts on January 1, 2020.

2. Does the five-year rule apply to every account?

For Roth IRAs, the five-year clock starts ticking when you make your first contribution to any Roth IRA.

With employer plans, each account you own is subject to a separate five-year rule. However, if you roll assets from a former employer’s 401(k) plan into your current Roth 401(k), the clock depends on when you made the first contribution to your former account. For instance, if you first contributed to your former Roth 401(k) in 2014, and in 2020 you rolled those assets into your new plan, the new account meets the five-year requirement.

3. What if you roll over from a Roth 401(k) to a Roth IRA?

Proceed with caution here. If you have never previously contributed to a Roth IRA, the clock resets when you roll money into the Roth IRA, regardless of how long the money has been in your Roth 401(k). Therefore, if you think you might enact a Roth 401(k) rollover sometime in the future, consider opening a Roth IRA as soon as possible. The five-year clock starts ticking as soon as you make your first contribution, even if it’s just the minimum amount and you don’t contribute again until you roll over the assets.1

4. What if you convert from a traditional IRA to a Roth IRA?

In this case, a different five-year rule applies. When you convert funds in a traditional IRA to a Roth IRA, you’ll have to pay income taxes on deductible contributions and tax-deferred earnings in the year of the conversion. If you withdraw any of the converted assets within five years, a 10% early-distribution penalty may apply, unless you have reached age 59½ or qualify for another exception. This rule also applies to conversions from employer plans.2

1You may also leave the money in your former employer’s plan, roll the money into another employer’s Roth account, or receive a lump-sum distribution. Income taxes and a 10% penalty tax may apply to the taxable portion of the distribution if it is not qualified.
2Withdrawals that meet the definition of a “coronavirus-related distribution” during 2020 are exempt from the 10% penalty.
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If You Have or Are a Stay-At-Home Spouse, You Should Consider a Spousal IRA

An ongoing study of IRA accounts has consistently found that women, on average, have lower retirement savings balances than men (see chart below).

Though there may be multiple reasons for this disparity, the most fundamental are the wage gap between men and women and the fact that women are more likely than men to take time off to care for children and other family members (1).

This traditional wage gap has been narrowing when you consider younger women, and also the fact that more men are stay-at-home dads. But the imbalance remains (2).

Obviously, earning less makes it more difficult to save for retirement. And a mother — or father — who stays at home to take care of the children may not be contributing to a retirement account at all. The same situation could arise later in life if one spouse works while the other takes time off or retires.

Additional Savings Opportunity

A spousal IRA — funded for a spouse who earns little or no income — offers an opportunity to help keep the retirement savings of both spouses on track. It also offers a larger potential tax deduction than a single IRA. A spousal IRA is not necessarily a separate account — it could be the same IRA that the spouse contributed to while working. Rather, the term refers to IRS rules that allow a married couple to fund separate IRA accounts for each spouse based on the couple’s joint income.

For tax years 2019 and 2020, an individual with earned income from wages or self-employment can contribute up to $6,000 annually to his or her own IRA and up to $6,000 more to a spouse’s IRA — regardless of whether the spouse works or not — as long as the couple’s combined earned income exceeds both contributions and they file a joint tax return. An additional $1,000 catch-up contribution can be made for each spouse who is 50 or older. Contributions for 2019 can be made up to the April 15, 2020, tax filing deadline.

All other IRA eligibility rules must be met. If a spousal contribution to a traditional IRA for 2019 is made for a nonworking spouse, she or he must be under age 70½; the age of the working spouse does not matter for purposes of the spousal IRA. For contributions made in 2020 and later years, the age 70½ restriction has been eliminated by the SECURE Act.

Traditional IRA Deductibility

If neither spouse actively participates in an employer-sponsored retirement plan such as a 401(k), contributions to a traditional IRA are fully tax-deductible. However, if one or both spouses are active participants, federal income limits may affect the deductibility of contributions.

For 2019, the ability to deduct contributions to the IRA of an active participant is phased out at a joint modified adjusted gross income (MAGI) between $103,000 and $123,000, but contributions to the IRA of a nonparticipating spouse are phased out at a MAGI between $193,000 and $203,000 (for 2020, phaseout ranges increase to $104,000–$124,000 and $196,000–$206,000, respectively).

Thus, some participants in workplace plans who earn too much to deduct an IRA contribution for themselves may be able to make a deductible IRA contribution for a nonparticipating spouse.

Withdrawals from traditional IRAs are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn prior to age 59½, with certain exceptions as outlined by the IRS.

1,2 – Pew Research Center, 2019
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Two Keys to 401(k) and Retirement Investment Planning Success

Want to know a secret? The two keys to 401k investment and retirement success* are:

  1. Save and invest aggressively when young
  2. Manage risk well in allocations as you approach and enter retirement

I know those are oversimplified but they are accurate. Knowing this, when was the last time you evaluated how much you’re saving or made changes to the investment mix in your 401k; or for that matter, any of your investment accounts? If you’re like most Americans, it’s been a while.

According to an ICI.org analysis of over 30 million defined contribution plans in 2018, only 7.1 percent of 401(k ) participants made changes to the allocation of their existing 401k balances and only 4 percent made changes to new contribution allocations. Compare this to finding from this same research taken ten years earlier (2008) where 14.4 percent made changes to the allocation of their existing balances and  12.4 percent made changes to new contribution allowances and it’s apparent people do not stay on top of their retirement savings investments. Some of this complacency is due in large part to a long-running bull market where complacency towards risk management has taken control. You may be saving well, but if you’re not managing risk it will come back to bite you.

Recent research from Research Affiliates reiterates that there are two keys to success in the investment world: investor contributions and investment returns. “Well, duh! Of course!” you may say. But what seems simple is rarely easy. Contributions and returns today can have a large influence on how well your retirement plan serves you into retirement. But, as this research also shows, each of these has distinct effects over your time of saving.

Let’s take a look at both of these and I’ll make some suggestions for you to implement immediately if you want to grow and protect your retirement savings.

 “When” trumps “How Much”

When you save can be more important to success than how much you save. The obvious challenge with trying to save when you’re younger is that there are competing demands on a smaller income.

You’ve probably seen the multitude of tables that illustrate the dramatic impact saving early can have on your future. Not too long ago I was able to illustrate this to a young man who came seeking advice. We looked at the tremendous impact of just a single annual Roth IRA contribution beginning in his twenties and lasting for just twenty years (ignoring taxes and inflation).

We assumed a 25-year-old making an annual contribution of $5,500 into an account earning 6% annually. Over twenty years this creates a balance of ~$207,038 at age 45. With no further contributions, at his age 65, the balance would be ~$663,998. Only $110,000 of this value represents contributions.

Now, take the same case above but reduce the annual savings rate to $3000 for the first 20 years. At 45 he has ~$112,929 and at 65 ~$362,178. He actually contributed $60,000.

The takeaway with our example is that starting early makes a huge difference and the more the better. Even if you can’t save the maximum amount, just start saving now! Unfortunately, many savers wait until their 40’s to begin saving, putting themselves at the detriment of time instead of using time early to multiply their money.

While the rate of return is certainly important, it’s more important that you ‘just do it!’ when you’re younger. For example, in the initial scenario above, if the rate of return were 8% instead of 6% over the first twenty years the increase in the balance is about ~$55,000. That’s certainly better, but not nearly as important as the fact he started early. Considering 55 percent of Americans have less than $10,000 in retirement savings (Cameron Huddleston – GOBankingRates) I’d say he’s off to a great start.

Rate of Return Matters More – Later

In the latter stages of saving (like in our 45-65 example above), the rate of return on your money, rather than adding more to it, is the principal driver of the ending value when it’s time to start living off of your life savings. I’m not suggesting that contributions are unimportant; but the facts are that your rate of return is more important. A $25,000 contribution in one year into a balance of $750,000 is only 3% of the total. An 8% ROR producing $60,000 on that same balance is much more significant. Higher rates of return on larger pools of money in later years makes a bigger difference than additions (combined they’re even better obviously). The problem here is that just when this ROR need is most prevalent is when you must begin to think about reducing risk ergo rate of return to some degree.

Allocation Matters Most

So how do you balance return needs knowing there’s a risk trade-off? A primary way is to be in the right part of the market at the right time. We refer to this as ‘asset allocation’. However, because no one can time the market, most investors embrace a buy and hold approach that allocates assets across many asset classes in the thought that the winners will outweigh losers over time. Just ride it out and let time be your friend.

Our approach by comparison is to actively monitor the different asset classes and market sectors and do our best to regularly navigate between them, even being willing to move out of them altogether to seek to avoid periods of extreme volatility (risk of loss).

Another way to increase return is to use lower-cost instruments. Your 401k account and many advisors most likely offer mutual funds. Many mutual funds have internal fees and sales charges that are typically more expensive than comparable exchange-traded funds (ETF’s).

With respect to the younger readers – start now.

With respect to older readers – proper positioning matters considerably more to risk and return than any time in your life.

If you want clear direction for your retirement and you’d like a no obligation analysis of your holdings, please call to arrange a time to do so. You may be shocked at what you really own!

* Asset Allocation does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.


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Rethinking Retirement Income

A frequently asked question in our office is related to the subject of Social Security income and whether it will continue in its current form, be changed or be there at all in the future. Since Social Security checks are many people’s primary source of retirement income, what people are really asking is how their primary source of retirement income may be affected and their ability to circumvent a problem should it arise.

In short, no one truly knows what changes will ultimately happen with Social Security. Those decisions are left to our politicians and we see how well decision-making and compromise works in that world don’t we?

Everyone reading this is either retired or aspiring to be at some point in the future, so let’s unpack this a little and see if we can provide some help in how to think about your retirement income needs. Please understand as you read, I am not associated with or endorsed by the Social Security Administration or any other government agency.

The OASDI (Old-Age, Survivors, and Disability Insurance) Trust Fund (also known as the Social Security trust fund) has been in trouble for quite some time in terms of long-range solvency. The Social Security Administration’s website is not shy about touting this fact.

The last seven Trustee Reports have indicated that without some type of change by lawmakers, Trust Fund reserves will be depleted between 2033 and 2034, under the economic and demographic assumptions they use. In summary, in under 15 years…maybe sooner…scheduled Social Security tax revenues will only be sufficient to pay about three-fourths of the scheduled benefits after depletion of the Trust.

In my opinion, Washington got us into this mess through a whole host of things it has either caused, allowed or refused to address. Now they want to lay the problem at the feet of those who’ve already paid into it the system or are currently paying in…those who have earned it and depend on it the most, right when they need it the most. Not fair, not right, but it’s where we are.

In fairness, lawmakers have been proposing ideas through legislation for many years. Nine proposed pieces of legislation were filed in 2017, seven in 2018 and 2019 has seen filings as well. The problem is that few legislators have the political will to follow through with substantial changes because of the fallout they fear may ensue at the ballot box.

The purpose of this article, however, is not to discuss politics and how Social Security may change. Anybody’s guess is good. What we do know is what will happen if nothing changes and that’s not good either. I happen to believe that certain segments of the population (such as current recipients) will be “grandfathered” from future changes, but we will see.

Social Security was originally never intended to be the sole, primary source of retirement income. Instead, it was meant to be a backstop or helping hand for retirees. As we already pointed out, for most people, it is their only retirement income.

Let’s look at the implications for two groups: Those who have not yet retired and those who have.

Aspiring Retirees

As you are approaching retirement, it is good to know not only how your current financial situation looks in relation to your retirement goals but also what options you may or may not have, should life throw you a curveball. When we design financial planning strategies for our clients, we look at many different areas, with income being just one important piece.

For instance, while we plan around Social Security in its current form, we can also forecast a “what-if” analysis showing how your income would be affected. What would you do if this or that happened? Would you have to reduce expenses? Sell your home? Would you have enough retirement assets to make the retirement you envisioned work?

Speaking of work, would you have to work longer or indefinitely to some degree because of a change with your Social Security estimates? It’s always better to be prepared and informed in decision-making.

Already Retired

For our readers who are already retired and likely receiving or soon to be receiving Social Security benefits, many of the principals that I’ve just mentioned for aspiring retirees apply to you as well. As mentioned, I believe if changes are made to the OASDI system those already receiving benefits are less likely to be affected. However, that’s not guaranteed! Therefore, prudence would say be ready, know your options and have a handle on what changes you could make if your benefits were suddenly cut. How would it affect you and your retirement?

Social Security is simply one aspect, but a very important aspect, of an overall income strategy for retirement. There are five critical pieces to any strategic retirement plan. Do you know what they are and more importantly, do you have a written plan? Most people don’t.

Every day we help readers just like you find clear direction for their retirement. We’d love to help answer the questions you have about navigating your unique situation. Give us a call or come see us, I look forward to meeting you.

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IRA Planning

IRA Planning – What Now with New Tax Laws?

Change, as annoying as it can be, is inevitable and so we must be proactive in dealing with it. This is especially true as it pertains to our finances.

For most investors, qualified tax-deferred accounts (IRA’s, 401k’s, etc) are where the majority of their retirement assets are held. In that regard, there have been recent changes in the tax laws that should be analyzed for their impact on the future of your retirement plan. Furthermore, possible legislation like the “Secure Act” could further change implications to these types of accounts but we’ll address that in a separate publication.

Specifically, there are some IRA ideas on the individual (non-corporate) side that should be considered given these changes.

  1. Deductibility of IRA management fees:

Advisor fees may be deductible on an itemized basis depending on the type of fee. Fee-based investment management fees could be deductible subject to your AGI. However, fees paid for fee-only, advice-only, fee-for-service planners/advisors generally are not deductible. The costs of transactions and the financial products themselves are not deductible on an itemized basis. Your CPA can help you with this so you know what’s deductible and what’s not as well as the best place(s) from which to pay fees for particular types of accounts (IRA vs Non-IRA).

  1. Roth Conversions:

This can be substantial if you miss it. You can no longer reverse or re-characterize Roth conversions. Once a conversion is done, it’s done! Gone are the days of seeing your tax bill the following year and deciding to reverse the decision.

This is not to say that Roth conversions are a bad idea. On the contrary, an effective Roth conversion strategy could be more attractive now than ever due to low tax rates and larger standard deductions.


  1. Qualified charitable distributions (QCD):

This one applies for those already over 70.5 years of age. For many, charitable gifts will no longer be deductible because taking the larger standard deduction will be more advantageous than itemizing. However, you can still effectively get the deduction by not only taking the new, larger standard deduction but also making charitable donations by way of QCD, which is excluded from income.

A QCD must be a direct transfer from the IRA to the charity, can be up to $100,000 per person and meet the RMD requirements for IRA’s. The charity must also be an eligible entity. The QCD does not increase Adjusted Gross Income for tax purposes like an IRA distribution does. As a result, charitable giving can be done without affecting Social Security benefits and Medicare premiums. 

  1. Required Minimum Distribution (RMD) Planning:

It is very important to make sure that you are meeting your RMD obligation annually from your IRA’s. Remember, there is a 50% penalty imposed for missing an RMD. That is substantial!

RMD planning can apply to those IRA owners that are over 70.5 but could also apply to younger beneficiary IRA and beneficiary Roth IRA owners depending on the situation. Pending legislation could change the RMD start age but that remains to be seen for the moment.

For those over 70.5, the QCD mentioned above is a good way to help meet those obligations. RMD’s for those who own multiple IRA accounts can be aggregated and pulled from one single account, if desired, and must be pulled by year-end unless it’s your first RMD year.

First-year RMD’s can be deferred till April 1st of the following year but then must be taken in conjunction with the current year’s obligation thus doubling the RMD for that year.

Don’t wait till tax time next year to review your strategies and figure out what changes (if any) need to be made. There is no time like the present to make adjustments and get prepared.

We can help coordinate and implement the items mentioned here with the rest of your overall retirement strategies. We are happy to help so just give us a call and book your no-obligation review today. We look forward to meeting you!

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The Next Step?

For more information about any of the products and services we provide, schedule a meeting today or register to attend a seminar.

Or give us a call at 866-416-1703 OR 936-449-5952