Lakeside Financial Planning – Advisor Insights

5 Ways to Turbo Boost Your Savings in 2017

MONEY TALKS – Achieving your goals and aspirations may be closer than you think. Saving is the foundation to any good financial plan. Follow these five steps to boost your savings to the next level!

  1. Max Out Your Retirement Plans – In 2017 you can defer up to $18,000 of your salary into an employer sponsored retirement plan such as a 401(k), 403(b), or 457 plan. If you are age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000. If your employer doesn’t offer a retirement plan you may still be eligible to contribute to a Traditional or Roth IRA. The IRA contributions limits for 2017 are $5,500 or $6,500 for those age 50 or older. If you didn’t maximize your IRA last year there is still time. The Internal Revenue Code has a special provision permitting you to make a 2016 contribution up until April 17th of 2017.
  1. Know How Much You Are Spending – Most people have no idea what they are actually spending. While some bold participants may blurt out a response when asked, in my experience what people say they are spending and what they are actually spending are two very different numbers. A good back of the envelop approach to calculate your spending is to look at your final pay check for 2016. Take your year to date gross pay and subtract any taxes paid as well as any employee benefits such as medical, dental, and retirement contributions. This in effect is your take home pay. From there subtract any additions you made to long term savings accounts throughout the year and you have calculated your annual spending. Most people are surprised by how much they are spending. Now that you know how much you’re spending, keep any eye on major outflows and set up an automatic transfer to your savings account to ensure some money is put away before hitting your pocket.
  1. Review Your Investment Portfolio – When it comes to determining an appropriate asset allocation, most people take the set it and forget it approach. Meaning they randomly picked some stock and/or bond mutual funds when they enrolled in their employer retirement plan, and they have not looked at it since. For many of us this could be 5, 10, or even 20+ years. Review your most recent portfolio statement to see if your current allocation is still appropriate for your age. Traditionally younger investors can be more aggressive and allocate a higher percentage of their portfolio towards equities. On the other hand, seasoned investors whom are approaching retirement may want to reduce their risk by diversifying into more bond funds and less stocks. If your current asset allocation is appropriate for your age, be sure to rebalance your accounts annually to make sure your portfolio stays properly aligned.
  1. Take Responsibility – The glamorization and/or demonization of politics and economics by the media can be hard to ignore because they are on the face of every TV station, newspaper, and social media site. Nonetheless, it’s essential to remember that for the most part these situations are out of your control. However, that doesn’t mean you should sit idly by and hope for the best. To use a weather analogy, while you don’t have control over when the next snow storm will hit, you do have the ability to buy snow tires for your car, a new shovel, and salt for your driveway. By personally managing the internal factors in your life such as; how much you save, your consumer loan balance, and the size of the home you purchase, you are taking responsibility over the aspects in your life that allow you to control your own financial destiny rather than taking a back seat to external factors over which you are powerless.
  1. Invest in Yourself – Many people don’t realize that the greatest financial asset they have is themselves; i.e. their ability to earn a living. Investing in post-secondary education, technical training programs, and advanced degrees go a long way toward building a complete resume. Combine these skills with quality work experience and you have just positioned yourself for a financially rewarding career.    

5 New Year’s Resolutions for 2017

MONEY TALKS – Lakeside Financial Planning was fortunate enough to be featured in a recent article on Investopedia’s advisor insights platform. The article is published below or you can view the original source by clicking here.

1. Pay off Consumer Debt
Credit cards can have interest rates well into the double digits. Paying off credit card debt is a great way to free up cash flow for the future. Credit card purchases are generally for short term items that have no lasting value. Putting away your credit cards and learning to live within your means can go a long way towards financial independence. If you are prone to consumer debt, try consolidating your credits cards down to one and using cash for everyday purchases.

2. Build an Emergency Reserve
Wage earners should have a minimum of 10% of their gross annual income in a long term savings account. An additional 20% should be saved as an emergency reserve. The best place for your emergency reserve is within your 401(k) or other tax sheltered accounts because the interest earned is tax deferred. Self-employed and retired individuals should build their cash/emergency reserves to an even greater level. As an additional test, the combined value of cash and emergency reserves should be at least 20% of your mortgage balance.

A Home Equity Line of Credit or HELOC is loan where a homeowner can borrow against the equity they have in their home. Unlike a conventional home equity loan where the borrower is advanced the entire lump sum up front, a HELOC is different in that the borrower only draws on the line of credit if needed. A HELOC could be used to cover a variety of expenses including unforeseen outlays for home improvements or medical bills. Homeowners should consider getting a HELOC as a supplement to their cash/emergency reserves as an added security blanket.

3. Purchase Long Term Disability Insurance
For most workers, the ability to earn a living is their most significant financial resource. A disabling illness or injury stops income, often leads to additional medical costs, and prevents savings for key goals such as education and retirement. Despite these facts, employees are more likely to have dental insurance than long term disability. The reason for this is most people associate disability with serious accidents. Since very few employees have high risk jobs, the general inclination in the workforce is to say, “I don’t need it” when it comes to disability insurance. In reality this couldn’t be further from the truth as 90% of disability claims are due to illness not injury. Even people who don’t have high risk jobs are still at risk of disability from cancer, cardiovascular, muscular, or other illnesses. A disabling illness or injury can have a devastating effect on you and your family. Purchase long term disability insurance now to protect you and your family’s financial security.

4. Increase Retirement Savings
Most company retirement plans allow you to enroll in a plan where your contributions are automatically deducted from your paycheck and directly deposited into the retirement plan. The beauty of automatic deductions is, since you never see the money, it’s nearly impossible for you to spend it. The only problem with this out-of-sight, out-of-mind enrollment process is most people set up a standard contribution rate when they enroll in their plan and never think to increase it. Lots of employers now offer an auto increase plan where your contribution percentage will increase by 1% per year. If your employer offers an auto increase plan be sure to enroll, if not then be sure to increase your contribution percentage manually each year. Consider investing in an Individual Retirement Account (IRA) if your employer does not offer a retirement plan.

5. Create an Estate Plan
Approximately 55 percent of American adults do not have a will or other estate plan in place. The primary reason for this staggering statistic is twofold; one being that no one wants to think about their own demise. The other; more alarming reason, is because many Americans are ill-informed on benefits of an estate plan. The most common excuses I hear are; “I don’t have children so I don’t need an estate plan” and “estate plans are only for wealthy families.” Both of these statements couldn’t be further from the truth. Most people don’t know that one of the primary purposes of an estate plan is to give guidance while you are still living. Questions such as, whom do you want to make medical decisions on your behalf or what are your wishes concerning life-prolonging procedures are typically addressed in a comprehensive estate plan. Regardless of your wealth or family situation an estate plan is beneficial for everyone involved.

How Much Do I Need to Retire?

MONEY TALKS – Friends and family often ask me how much savings they need in order to retire. While I am more than happy to talk in generalities, I try to steer away from giving any specifics when I don’t have all the facts. Without a complete view of their financial picture, it would not only be impossible but irresponsible of me to answer their questions.

Unfortunately, more often than not, before I have a chance to respond, they hastily begin shouting out numbers. “Do I need ½ million? 1 million?” Typically this leads to me awkwardly trying to explain that the solution isn’t that simple and ethically I really shouldn’t answer their question. This response is usually met with a bewildered look and the inevitable “So you’re saying that’s not enough?” (Heavy sigh) At this point I coyly suggest that if they really want to know the answer they should become a client.

In an effort to provide friends and family with some guidance (and to quell the family banter), I have devised a quick back of the envelop calculation to give you a ballpark estimate of how much savings you need to retire. The calculation is rather easy to complete but does require some preliminary information before you can get started. I have included here a list of the necessary data as well as a simple worksheet that will walk you through this back of the envelope approach. Please bear in mind that this is a rudimentary calculation that won’t give you an exact figure, but it can be used as a reality check to see if you are on target to retire comfortably.

Here’s what you will need:

  • Pay statement
  • Federal and state tax returns
  • Social Security statement
  • Pension statement
  • Estimate of any other income you may receive in retirement.

In order to help illustrate the underlying methodology let’s consider the following scenario:

  • Tom (60) and Rachael (58) are married with four kids. Tom, an engineer by trade, is the primary wage earner with a gross salary of $150,000 per year. Rachael works as teacher earning $50,000 per year. Tom’s net take home pay is $3,750 and Rachel’s net take home pay is $1,250.
  • They both get paid twice per month, for a total of 24 times per year.
  • Last year they paid $18,400 in Federal taxes and $6,600 in state taxes.
  • Neither Tom nor Rachel are eligible for medical benefits through their employer after they retire. When eligible, they plan to go on Medicare and purchase a supplemental Medigap policy.
  • Tom is eligible for Social Security and expects his annual benefit at full retirement age to be about $43,000. Rachel earnings as a teacher do not qualify for Social Security benefits; however, through her teachers union, she is entitled to a pension benefit of $40,000 per year. Neither plan to seek part-time employment in retirement.
  • Tom and Racheal both plan to work until their mid-sixties. They live a healthy lifestyle and plan to live well into their nineties.

Now let’s work through the numbers:

retirement-chart

Based on the chart above, Tom and Rachel would need about $1.5 million in order to retire.

While I hope that you find the above exercise helpful, please keep in mind that is a static calculation which doesn’t take into account life changes that may occur in retirement. To get a more precise calculation or recommendation, I would encourage you to reach out to a qualified financial advisor.


*Multiplier is based on a success rate of 90% or more for a 15, 30, and 45 year portfolio. The calculations were completed by William P. Bengen, CFP® and can be found is his book Conserving Client Portfolios During Retirement.

** Note: the Savings Required field is not specific in nature and does not take into account your individual facts and circumstances. Accordingly, this should not be relied upon when determining how much money you need to retire, nor does it substitute for any legal, financial, tax, or accounting advice.

A Beginners Guide to Maximizing Your 401(k) Plan

MONEY TALKS – In today’s workplace environment, unless you are working as a teacher, police officer, firefighter, or state/federal employee, the chances are you do not have a pension plan. In other words, when it comes to funding your retirement YOYO (you’re on your own). For most private sector employees, defined contribution (DC) retirement plans are their primary savings vehicle. DC plans are a type of retirement plan where an employer and/or employee make regular contributions. They differ from a pension plan in that there is no guaranteed income stream at retirement. Instead, both the employer and employee contributions, plus any investment earnings, grow together in an account where the employee has control over the cash distributions during their retirement. The most common DC plan is the 401(k) plan which has grown to become America’s de facto retirement savings plan since its inception in the late 1970’s.

A 401(k) plan is a great savings vehicle for a number of reasons. First and foremost any contributions made by the employee are tax deductible. Secondly, any earnings in the account grow tax free until they are withdrawn. Unfortunately many Americans are not taking full advantage of the benefits a 401(k) plan has to offer. There are two primary culprits behind this underutilization; lack of participation and low contribution rates. In order to ensure you are getting the most out of your 401(k) plan, make sure to follow these guidelines.

Start Contributing Early
During your first week of work you will likely be given a large packet of information listing everything from your vacation accrual to your medical benefits. Included in this packet should be an enrollment form for your employer’s 401(k) plan. You should sign up for your 401(k) plan immediately. Some employers may have restrictions on when you can start contributing or an elimination period before the employer themselves match any contributions; however, these restrictions typically do not prevent you from enrolling in the plan.

If you have already been working but have yet to sign up, there is no time like the present. To borrow a line from a colleague of mine, “You will never be younger than you are today.” When it comes to investing, the longer the time horizon, the greater the growth potential.

Maximize Your Employer Match
Most employers will make a modest contribution to your 401(k) plan presuming you do one thing; contribute to the plan yourself. While there is a wide range of company match levels, a typical employer match policy might read something like this: XYZ agrees to match 50% of employee contributions for the first 6%-of-salary that an employee contributes. In this scenario, in order for an employee to maximize their employer match, they would need to contribute 6% or more of their salary into their 401(k) plan. Any contribution below 6% means the employer is not obligated to contribute the full match.

Maximizing your employer match is critical to building your retirement nest egg. Not contributing or under contributing to your own plan means you are essentially throwing money out the window. An employer match is a guaranteed return on investment which is rare if not impossible to find in this day and age.

Take It to the Limit
The most common way to contribute to a 401(k) plan is through automatic payroll deductions. Many plans allow you to designate a percentage of your gross income to be allocated to your 401(k) plan. A good rule of thumb is to contribute 10% or more of your salary into your 401(k) plan. Unfortunately, for many young or underpaid employees this figure is simply unrealistic. For those who can’t save 10% or more, start off by saving the minimum allowable contribution that enables you to maximize your employer match. Most employer plans require employee contributions between 4% and 8% to receive the maximum match.

Automatic contribution increases are another great way to get the most of your 401(k) plan. As the name infers, an automatic contribution increase is simply an election you make to annually increase your contribution percentage (typically by 1%). The beauty of this election is it forces you to save more each year and they typically coincide with a merit increase so the effects are negligible. If your company doesn’t offer this election then remember to manually adjust your contribution percentage each time you get a raise.

Keep in mind that the Internal Revenue Service regulates how much an employee can contribute to their 401(k) plan. In 2016 the contribution limit is $18,000. If you are lucky enough to be age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000.

Take a Look at Yourself

MONEY TALKS

In today’s day and age, people love to get caught up in the latest headlines: “Interest rates are near all-time lows”, “Gas below $3 a gallon for the first time in four years”, “Savvy investors should watch for bear market warning signs”. In fact, they often get so consumed with these external factors they’re convinced they have no control of their financial destiny. Some even go so far as to blame their financial problems on inflation, interest rates, politics or myriad other external factors. The truth of the matter is, although they may not know it, they are in complete control.

Don’t get me wrong exogenous, or external, factors do have an effect on your financial wellbeing. However, since you have as much control over the stock market as you do the weather, I would argue that there are far more sensible things to worry about. Perhaps this can best be illustrated by retelling one of my favorite stories by Bert Whitehead, a leading authority on financial planning and old colleague of mine. In 2002 a client came to him asking if he should pull his money from the stock market because of the rising possibility of war in the Middle East. His client was clearly agitated with the political landscape of the country and the resulting world events that had transpired. Without hesitation, Bert sarcastically responded, “Why? Are you getting drafted?” I know this is a serious topic and should not be taken lightly, but the point of the story is, although these predicaments often make the headlines, they rarely have a significant impact on our financial situation unless we are directly affected (e.g. getting drafted).

The glamorization and/or demonization of politics and economics by the media can be hard to ignore because they are on the face of every TV station, newspaper, and social media site. Nonetheless, it’s essential to remember that for the most part these situations are out of your control. However, that doesn’t mean you should sit idly by and hope for the best. To stick with the weather analogy, while you don’t have control over when the next snow storm will hit, you do have the ability to buy snow tires for your car, a new shovel, and salt for your driveway. By personally managing the internal factors in your life such as; how much you save, your consumer loan balance, and the size of the home you purchase, you are taking responsibility over the aspects in your life that allow you to control your own financial destiny rather than taking a back seat to external factors over which you are powerless.

On any given day you probably make hundreds of decisions that have a direct impact on your finances, from deciding whether to dine in or go out, to buying toothpaste at CVS vs. Target. While every decision has some impact, certain decisions obviously carry more weight than others. To get you on the right track, I compiled a small list of steps you can take to give you power over your financial future.

Start off by setting up and contributing to your company retirement plan. It is tax deductible and more often than not your employer will match a portion of your contribution. Once your retirement plan is set up, put any extra money you can set aside into an emergency reserve fund. This will allow you to weather the storm (pardon the pun) when things go awry. Paying off credit card and other consumer debt will reduce the chances of hard earned money being wasted on interest payments. Buying a home that fits into your budget will allow you to afford discretionary items while paying your bills on time. Lastly, make sure to invest in your career. Education and experience are the primary vehicles that will drive your career and increase your earnings potential.

Over time the factors you can control will have a much greater impact on your finances than external factors. So before you go blaming the market for your latest woes, take a look at what you can control, it will go a lot further than you think.

How a Roth IRA Can Benefit You

In today’s day and age, retirement planning has gotten more complicated than ever. This is primarily due to the complexity of the tax code as well as the vast choices available. Unless you are a retirement benefit specialist, understanding the differences between a 401(k), 403(b), 457, SIMPLE, SEP, SARSEP, and IRA can be agonizing. Yet the reality of the situation is; there is a lesser known retirement plan called a Roth IRA that provides tremendous flexibility in retirement and beyond. What’s more, because of the low cost nature of these plans nearly anyone can participate regardless of their employment status.

Most of us have at least heard the term “Individual Retirement Account” or “IRA”. However, a lot of people are still in the dark when it comes to understanding Roth IRAs. A Roth IRA is a retirement account where after tax money is contributed and the contributions, as well as any earnings, grow tax free. However the major advantage of a Roth, that separates it from other retirement vehicles, is the tax treatment of the distributions, or withdrawals. Any qualified distributions from a Roth IRA, no matter how large, are tax free!

In order to fully understand the benefits of a Roth IRA, I think it’s worthwhile to understand the basic differences between the two retirement accounts. The primary difference between a Traditional and a Roth IRA is the tax treatment of the both the contributions and the distributions. In a Traditional IRA, contributions are tax-deductible, similar to a 401(k) plan, however contributions to a Roth IRA are not tax deductible. On the other hand, qualified distributions from a Traditional IRA are taxable, yet any qualified distributions from a Roth IRA are tax free.

To put this in perspective, let’s assume throughout your career you contributed $50,000 into your retirement savings. Presume your investments performed well and the balance grew to $200,000 by the time you retired. If you had contributed to a Traditional IRA you would have saved taxes on the $50,000 you contributed however you would be obligated to pay taxes on the entire $200,000 upon withdrawal. Contrastingly, if you contributed to a Roth IRA, you would not save any taxes on the $50,000 you contributed, because Roth IRA contributions are made with after tax dollars, however the entire $200,000 would be tax free upon withdrawal. Despite not receiving any initial tax benefit from your contributions to a Roth IRA, the benefits of tax free withdrawals far outweigh the initial tax savings due to the capital appreciation within the account.

A Roth IRA can also be particularly advantageous when a retired individual has other sources of income, whether that be from a part time job, social security, and/or pensions. If they had a Traditional IRA, once they turn 70½, they would have to start taking required minimum distributions (RMDs) based on their life expectancy. These distributions could catapult them into a higher tax bracket where they would be paying taxes on money they may not currently need. If instead the funds were in a Roth IRA, which generally does not have RMDs, the account holder would have the flexibility of deciding when or if they wanted to take a distribution. Not to mention, even if the account holder wanted to take a distribution to supplement their income, it would be tax free.

Another advantage of the Roth IRA is when it is used as a vehicle for Estate Planning.  As previously mentioned a Roth IRA has no RMDs during the lifetime of the owner. Moreover, if the surviving spouse is the sole beneficiary of a Roth IRA, there are no RMDs during the life of the surviving spouse either. Once the surviving spouse passes, assuming a child is the beneficiary, the account balance must be distributed over the life expectancy of the child, which could be 20+ years. Keep in mind that balance will continue to grow tax free and the distributions still remain tax free. The ability to stretch this tax free benefit from one generation the next simply cannot be understated.

In summary, the tax free nature of the Roth IRA distributions, along with the lack of required distribution rules, creates tremendous opportunities for clients with Roth IRAs. If you would like to find out more about whether a Roth IRA might be a good fit for you please contact your local financial advisor.