Winning the Race Between Time and Money – Part III: Personal Savings and Investments

By | Building Financial Independence

Winning the Race Between Time and Money – Part III: Personal Savings and Investments

 

Individual savings and investments are the third primary source of retirement income. When you retire, you no longer receive a paycheck, so principal preservation and safety should be high on the list of key investment objectives. The question is: what investment vehicle should you choose? In the perfect world, the ideal vehicle would have all the following characteristics:

• High rate of return
• Safety
• Liquidity
• Tax efficiency
• Simplicity

In the real world, however, such a “perfect investment” does not exist. Individuals must choose from a confusing range of investment vehicles, with varying degrees of risk, returns, and characteristics. The chosen investment vehicle for your personal funds depends on your risk tolerance, time horizon, income needs, tax bracket, and investment skills and experience.

There are certain proven strategies to consider for risk management:

1. Diversification: Also known as asset allocation, the goal of diversification is to spread your market risk around among different asset types. This strategy takes advantage of negative correlation among different asset types to smooth out the ups and downs in your portfolio over time. Stocks, bonds, cash, are the investments often used, although other products such as precious metals, real estate, and other alternative investments may also be included.
2. Position sizing and stop losses: for the stocks in your portfolio, two of the most underused but very effective risk management strategies are position sizing and stop losses. While position sizing determines how much of a particular stock to hold in your portfolio, stop losses help determine when to exit the market. Having a pre-determined exit strategy is an important part of equity investment.
3. For income tax efficiency, the general rule is to withdraw the money you need first from your personal savings and investments before dipping into your qualified retirement accounts so the latter can continue to enjoy income tax deferral status and allow you to keep more of what you make. If you are 70-1/2 or older, you must, of course, take the minimum distribution amounts required to avoid the hefty 50% deficiency penalty.

Click here for upcoming free retirement workshops. Offered in collaboration with Financial Aptitude Training, local libraries, and California Society of CPAs.

Click here for a complimentary retirement capital analysis.

Winning the Race Between Time and Money – Part II: Qualified Retirement Plans

By | Building Financial Independence

Winning the Race Between Time and Money – Part II: Qualified Retirement Plans

A retirement plan is considered qualified if it meets certain IRS tax qualification requirements. With a qualified plan, contributions are deductible while earnings inside the plan are tax deferred (until withdrawn). There are minimum distribution requirements and penalties for early withdrawal and excess contributions.

Your company retirement plan may either be a defined benefit pension plan or a defined contribution plan (such as a 401(k), 403(b), or a SEP plan). When you retire, you may either leave your plan with the company custodian (staying put), or, if the plan document allows it (most do), roll the plan over to your own individual retirement account (IRA). There are pros and cons for staying put or rolling out. The major advantage of staying put is the creditor protection consideration for company retirement plans. Company retirement plans are covered by the Employee Retirement Income Security Act (ERISA) and are completely protected from creditors (except the IRS and former spouses in divorce proceedings.) IRAs, on the other hand, are not covered by ERISA, so they do not have the same creditor protection as a company plan. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has expanded the protection for IRAs up to $1.0million.

If credit protection is a concern, you would be well advised to consult an attorney.

Except for the credit protection consideration, rolling out the company plan to your own IRA may be more preferable. IRAs generally offer more flexibility in investment choices. Asset allocation can be customized to suit your own risk profile, and they can be professionally managed to meet your retirement needs. If your company plan holds highly appreciated stock in your employer company, you may benefit from the Net Unrealized Appreciation (NUA) strategy. NUA essentially allows you to roll out your employer stock to a nonqualified account and recognize income only on the initial purchase price of the stock (not the highly appreciated current value). Subsequent sales of the stock receive long term capital gain treatment. Talk to a qualified financial advisor about the NUA stratety because it must be carefully executed to qualify.

One more word of caution: when you roll out your company plan to an IRA, make sure you execute a direct rollover (or a trustee-to-trustee transfer) to avoid the mandatory 20% federal tax withholding.

Click here for upcoming free retirement workshops. Offered in collaboration with Financial Aptitude Training, local libraries, and California Society of CPAs.

Click here for a complimentary retirement capital analysis.

Winning the Race Between Time and Money – Part I: Social Security Benefits

By | Building Financial Independence

Winning the Race Between Time and Money – Part I: Social Security Benefits

 

If you are planning to retire this year, chances are you are mostly concerned with whether your nest egg will last through your retirement years; especially amidst the largest tax reform in recent history, rising medical costs, inflation, rising interest rate, and…among other things, no longer receiving a steady paycheck. It can be a scary undertaking.

In retirement, income and liquidity is KING, and careful planning is the key to achieving retirement peace of mind. Most retirees derive their retirement income from three primary sources: social security benefits, personal savings and investments, and qualified retirement plans. Prioritizing the withdrawal sequence from these income sources is key to the quality of your retirement life:

Social security benefits

When social security was initially enacted, it was meant to be a supplemental income source for a minority of retirees. With medical advances and health consciousness, retirees are now living much longer and healthier life, and social security has now become a primary retirement income source for the majority of retirees. For today’s retirees, the full retirement age is 66, increasing gradually to 67 for those born in 1960 and after. Full retirement age is when you receive full retirement benefits, unhindered by whether you continue to work or not. You may also apply for social security retirement benefits as early as 62; but your benefit amount will be permanently reduced. There may be claiming strategies where you may file for a restricted application for spousal benefit while letting your own benefit grow, and later switch to your own benefits down the road as a way to help maximize your household benefit amounts. Determining how and when you apply for benefits may make hundreds of thousands of dollars difference in your lifetime benefits. Talk to a National Social Security Advisor (NSSA) for an illustration.

Click here to talk to a National Social Security Advisor (NSSA) for an illustration.

Click here for upcoming free retirement workshops. Offered in collaboration with Financial Aptitude Training, local libraries, and California Society of CPAs.

Click here for a complimentary retirement capital analysis.

Market Analysis: The Real Political Risk That May Derail the Market

By | Building Financial Independence, Portfolio Management

Market Analysis: The Real Political Risk That May Derail the Market

No, it is not the government shutdown. Shutdown is just the opening act. It doesn’t have any teeth; in my view, shutdown is not the real risk. In fact, the S&P 500 is up nearly 1% since the shutdown became apparent last Friday. Now that the proverbial “shutdown can” has just been kicked down the road to February 8, if Congress still can’t agree on a deal by then and the markets sold off, it would actually be a buying opportunity.

According to news headlines, what’s in the government pipeline includes:

  • Another government shutdown deadline on February 8
  • NAFTA risks (US in or out?)
  • Trade concerns
  • Debt ceiling deadline (March)

Even though the shutdown drama is not a real risk at this time, it’s a mistake to think that Washington isn’t a risk to the market in 2018.

So, what’s the real threat? The debt ceiling. Put simply, government shutdowns don’t matter to stocks, but debt ceilings do.

Let me explain.

Right now, we are fast approaching a hard deadline on:

  1. Immigration reform (the DACA issue) March 5
  2. The debt ceiling (March or early April)

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Government Shutdown and What It Means for Your Taxes

By | Tax Planning & Prep

Government Shutdown and What It Means for Your Taxes

The federal government shutdown officially began at midnight January 20, after the Senate came 10 votes short of reaching a temporary deal that would have kept the government open through February 16.

A shutdown plan posted on the Treasury Department’s website shows that nearly 44% of the IRS’ employees will be exempt from being furloughed during a shutdown. It also means that 56% of the employees will be sent home just as the agency is gearing up for the tax filing season.

So what does the shutdown actually mean for you and your taxes?

According to the FY2018 Lapsed Appropriations Contingency Plan (During the Filing Season):

“…the IRS will need to continue return processing activities to the extent necessary to protect Government property, which includes tax revenue, and maintain the integrity of the federal tax collection process, along with certain other activities authorized under the Anti-Deficiency Act.”

This means the opening of tax season on Monday, Jan. 29, should continue as planned.

The document lays out a series of activities that will continue to be conducted on a limited or intermittent basis; those of which that directly affect you include: Read More