Choose Your Retirement Accounts with Confidence!

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We all know and have been told that we need to save for retirement. The IRS recognizes the need to save for retirement so much that they have created several tax-advantaged accounts such as the 401(k) and individual retirement accounts (IRAs). There are a lot of choices when it comes to retirement saving. The number of choices can sometimes intimidate us so that we are not sure which is the better choice for ourselves or our family. But waiting until we “have more time” or until we get to that “dream career” or until we move to that “next stage of life” can cost us big-time in lost earning years and compound interest. Now is the time to take specific steps to plan and save for the future.

For most people, especially those who are young in the workforce, the best place to start is with the 401(k) retirement plan at work. This is particularly enticing if your employer matches a portion of your contribution. For all practical purposes, the match is essentially free money. Contribute at least enough to achieve the match, and then try to increase the amount contributed over time. Currently, the 2018 annual participant contribution limit is $18,500 or $24,500 for those 50 or over. The money is withheld through payroll deduction and you can save up to the contribution limit of your pretax income, in a Traditional 401(k), or after tax in a Roth IRA. If you leave your job, you can typically keep it in the plan, roll the account over into a new employer’s 401(k) (if allowable), or rollover to your own IRA. This type of retirement plan is more typical, employees of nonprofits may be offered a 403(b) instead. They have similar rules.

Anyone can contribute to an Individual Retirement Account (IRA). The 2018 annual limit is $5,500 and $6,500 if you are 50 or over. The money grows tax-free. You can contribute to both an IRA and a 401(k), but if you are covered by a plan at work, you cannot deduct your IRA contributions from your taxable income if you earn more than $73,000 for individuals (phase out from $63,000-$73,000) and $121,000 for married couples filing jointly (phase out from $101,000-$121,000). If you are not covered by a retirement plan at work, you get the full deduction no matter your income, unless you file jointly with a spouse who has a retirement plan at work.

With a Roth IRA, you are contributing with after-tax dollars and there is no tax deduction for your contribution. The money you earn grows tax-free, but unlike Traditional IRAs, you pay no tax on withdrawals after you reach 59 ½ and there is no mandatory withdrawal at age 70 ½. You can also withdraw the amount you contributed (not earnings, though) at any time with no penalty or no taxes due. The contribution amounts are the same as a Traditional IRA, but to contribute to a Roth IRA, you must make less than $135,000 for singles and $199,000 for married filers. If your income is more than or equal to $120,000 (single) or $189,000 (married filing jointly), your allowed contribution is reduced. You can contribute to both a Roth IRA and a traditional IRAs, but the limits apply to your total contribution.

Another less known way to save where you can also minimize taxes and prepare for health care costs is with a Health Savings Account. You can use the money for medications and doctor visits not covered by insurance, but you can also pay those expenses out of pocket and leave the money in your HSA to grow. If you need the money later, you can be reimbursed for past expenses. The annual HSA contribution limit is $3,450 for singles and $6,850 for families covered under qualifying family medical plans, with an additional $1,000 contribution if you’re 55 or older. If you leave the money in the account, it can stay in the account, unlike FSA accounts that must be used by the end of each year.  Once you are 65, you can withdraw money for any reason without penalty, but you must pay income taxes on the money you withdraw if it’s not for qualified medical expenses. Or, you can use it for qualified medical expenses tax-free. If you withdraw the money before you are 65 for any reason other than qualified medical expenses, you will have to pay taxes plus a 20 percent penalty, thus the need to save medical receipts!

If you are a sole proprietor, you can set up an individual 401(k) or solo 401(k) and make contributions as both the employee and employer. The business owner can contribute elective deferrals up to 100% of compensation up to the annual contribution limit of $18,500 ($24,500 if age 50 or over) plus employer nonelective contributions up to 25% of compensation as defined by the plan. Total contributions cannot exceed the 2018 limit of $55,000 (not counting catch-up contributions for those 50 and over). Self-employed individuals must make a special computation using the rate table in Chapter 5 of IRS Publication 560 to figure out the maximum amount of elective deferrals and nonelective contributions.

A SEP IRA is used primarily by the self-employed or small business owner. SEP stands for simplified employee pension and is usually easier to set up than a solo 401(k). Contributions are made to an Individual Retirement Account established for each plan participant and it follows the same investment, distribution, and rollover rules as traditional IRAs. The contributions you can make to each employee’s SEP-IRA cannot exceed the lesser of 25% of compensation or the 2018 limit of $55,000. The same percentage the employer contributes to the owner’s plan must be given to employees too. Again, if you are self-employed, you must use special rules to calculate contributions for yourself.

Simple IRAs allow employers with fewer than 100 employees to set up IRAs with less paperwork. Employers must either match employee contributions or make unmatched contributions. Employees can contribute/defer up to $12,500 annually with catch-up contributions of $3,000 for those 50+.

 So many good choices! Which plan, or combination of plans is right for you? If you have limited funds to start with, what to do first? If you have contributed the max to one, which is next? As financial planners our job is to walk you through your particular situation, needs and goals to determine the better choice(s) for you and your family. It is not only about dollar amounts, though that is a significant factor. Retirement is also about quality of life, expectations, and what is truly important to you.  Is it family? Health? Travel? Giving? What is important to you now and in the future needs to match where and how you spend and invest those dollars. No more putting it off. Start today.

 

Stay Focused. Stay Calm.

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In times of market volatility.

To Our Clients:

First of all, thank you for the opportunity to be a trusted advisor for your financial planning & investment needs. We take our responsibility very seriously and know it's important to you to be informed about the status of your financial plan and investment accounts.

After several years of very low volatility and new market highs, the last few months have reacquainted us with market volatility. 

It is our goal to have done a good job of assessing your risk tolerance and time horizon to build a portfolio that will meet your long term investment needs. We hope to have achieved this during the conversations we've had at our review meetings about market cycles and the inevitable return of market volatility and potential losses during those cycles.

None of us know what the future will hold, but we do know that the path to long term success in the market is comprised of a few key principles:

  1. Develop a sound strategy, and stick with it unless something significant has fundamentally changed.
  2. Keep fees in check. We use investment options that keep fees much lower than industry average!
  3. Stay consistent. Choosing to 'change horse mid-race' introduces additional risk to the portfolio at exactly the wrong time. 
  4. For those that are still in the accumulation phase, a market downturn represents an opportunity to buy the same assets at a reduced price, as hard as it may be to see it that way at the time.
  5. Stay focused on your long term goals. Stay calm even when it seems tough.

If you do have any questions or concerns, we are available. We want you to feel confident in your financial future!


Thank you,
Bridge Financial Planning

 

Investing: The Wind in your Savings Sails

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Many articles on investing assume you’ve invested before.  But what if you haven’t? Sometimes, it’s best to start from scratch!

So, why do we invest?

Put simply, we invest because if we stack cash under a mattress (or almost as bad, in a savings account with little to no earned interest), we’ll lose money over time to inflation. Have you ever heard an older family member play the “remember when” game? Remember when gas was $0.50 a gallon, remember when bread was $0.25, etc. What they’re talking about is the effect inflation has on the buying power of a dollar over time. If they had put money under the mattress back then and believed that it would buy the same thing today, they’d be pretty disappointed!

While we are currently in a very low inflation cycle, in any given year inflation can eat away substantially at your savings. In 10 of the last 16 years, inflation was above 2%, and as high as 3.85%. So, your earnings and portfolio growth needs to match that number just to stay even. Just to give you an idea of what happens to your hard-earned money if you don’t match inflation: At 3% per year inflation rate, $1 million in today’s dollars will deflate to about $412,000 in 30 years.

In a nutshell, that’s why we invest.

Ok, how am I supposed to keep up?

Historically, over the long run the best place has been in the stock market. A broad index of the U.S. Large company stock is the S&P 500 Index. Over the last 50 years, it has returned an average of 9.7%.

Stocks are fairly liquid (easy to convert to cash, compared to real estate, for example). And if you put them in an IRA, 401(k) or other tax-advantaged account, it’s a strategy that is hard to beat. They can grow on a tax-deferred or tax-free basis, depending on what type of account you pick.

But, the stock market can also be fairly volatile at times. That’s why it’s important to have a long term time horizon for investing (10+ years), otherwise a bearish market cycle could wipe out some of your portfolio’s value. In any given year, the value of a portfolio can be sharply lower or higher (2008 saw a loss of 38%, while 1954 saw a gain of 45%).

You can also help make your portfolio more stable by including other asset classes, like bonds (see below).

Be sure that you’re receiving professional advice to help target the right portfolio for your risk tolerance and time horizon. Many investors don’t actually get the returns that are cited because their risk tolerance doesn’t match their portfolio choices and they get nervous and sell when the going gets tough. In that case, you miss out on the rebound as markets improve.

What actually happens when we invest?

Well, let’s break it down by stocks (equities) and bonds (fixed income). There are other asset classes but we’ll stick to those two today. Let’s talk stocks first.

When you purchase the stock of a company, you are giving them cash to use for their business. In return, you become a partial owner in the business. When they do well, the stock goes up.  When they underperform, the stock goes down. That’s why it’s also important that you don’t ever buy just one or a few stocks, but invest in a variety of different types (like index funds or target date funds offer). It’s better to have enough stocks to give you a balance, that is, where some go up while others go down. This helps keep your portfolio more stable.

For the bond side, it’s easiest to think of it as a loan that you’re giving the company (or government). You give them your cash, they tell you when you’ll be paid back, and give you interest payments in the meantime. There are plenty of variations on this theme, but that’s the vanilla version. The interesting thing about bonds is what happens to their value if you decide to sell them prior to their maturity. If rates have gone up, you could lose money. If rates have gone down, your bonds could be worth more than the value when you purchased them. 

How can I get started?

Anyone can invest anytime, but some accounts offer tax advantages for specific purposes like education and retirement savings. As soon as someone has earned income, they can start contributing to IRAs, and opening an IRA can be a great way to start investing. See the IRS table here: IRS.gov - IRA Contribution Limits.

Most people really start investing when they get a job with an employer sponsored retirement plan. A 401(k) is one version, but there are several variations on that theme. The great thing about those plans is that contribution limits are higher than IRAs and there’s no income limit on contributions, unlike Roth IRA’s or deductibility for traditional IRA’s. Also, many employers offer a match on employee contributions. Definitely take advantage of this opportunity if you have it!

For small business owners, you have some pretty good options too: SEP IRAs, SIMPLE IRAs and other accounts that are made just for you.

The most important thing…

The most important thing is to start. Back when a bottle of Coke was a nickel, most employees could rely on pensions. Those days are gone and you’re mostly on your own for retirement savings. The value of starting early is undeniable. Just check out this recent article. Some may need more for their financial goals, some may be happy with less, but the numbers speak for themselves when it comes to investing early.

If you need some help determining the amount you should invest, and which investments are best for you, please contact a professional.

Something for women to consider:

As women, we tend to live longer than men, earn less, and to be the ones who take time away from our careers to raise children or care for aging parents. We also make a lot of the household purchasing decisions. For us, it is even that much more important that we take the time to develop a plan to help us reach financial independence and stability.

 

 

All written content is for information purposes only. Opinions expressed herein are solely those of Bridge Financial Planning, LLC, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.