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Choosing A Retirement Plan For Your Business

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What type of retirement plan to use is a big question for employers. Not only do they want to do what’s right for the business, but they also want to do what’s best for their employees and future employees.

In the following article, we’ll break down three of the most popular options for employer-sponsored retirement plans.

What are your options?

If you’re an individual, your options are pretty straight forward. Outside of your employer-based plan, you can either contribute to a Roth IRA or a Traditional IRA.

As a business, however, you have many other options. For organizations that are for-profit and not a government body, you the SEP IRA, SIMPLE IRA, and the 401(k).

More than likely, you’re most familiar with the 401(k). We’ll explore each of these below.

SEP IRA

Stands for Simplified Employee Pension Individual Retirement Account.

This retirement account is typically used with one-man shops or small businesses with a couple of employees.

The reason is the money contributed to the employee’s accounts can only come from the business. Employees are not eligible to contribute to their SEP account.

Here the characteristics of a SEP IRA:

  • Must contribute the same percentage of salary for each employee
  • Don’t need to contribute every year
  • Maximum contribution is $54,000 per year or 25% of annual salary, whichever is less
  • Contributions are deductible as a business expense for the entity
  • Money grows tax-deferred
  • When funds are withdrawn, they are taxed as ordinary income
  • Rules similar to a Traditional IRA
    • Withdrawals prior to 59 ½ unless used for a qualified purpose (qualified meaning exempt from the penalty, which is 10%)
    • Required Minimum Distributions must begin at 70 ½

SIMPLE IRA

Stands for Savings Incentive Match for Employee Individual Retirement Account.

Designed for small businesses, and has an employee limit of 100. If you go over 100 employees, you need to switch to a 401(k).

The SEP and SIMPLE (compared to the 401(k)) are inexpensive to set up and administer, and may be a great option for small businesses that want to offer a plan for their employees, but don’t want to pay the costs associated with a 401(k).

Here are the characteristics of a SIMPLE IRA:

  • Contribution limit of $13,000. A catch-up contribution of $3,000 for those 50 or older
  • Employees can contribute to their own plan (unlike the SEP)
  • Employers match contributions
    • Match up to 3% of employee’s contribution (doesn’t have to contribute if the employee doesn’t contribute).
    • Contribute a flat 2% whether or not the employee contributes.
  • Similar to the last plan, withdrawals before 59 ½ are penalized.
  • Also similar to the last plan, distributions must begin at 70 ½
  • There’s a weird quirk with the Simple, as well. If you withdraw funds earlier than 2 years after your first contribution, you’re penalized 25%.

401(k)

The 401(k). The plan that most people are familiar with, and if you have an employer-sponsored plan, it’s more than likely, this one.

The 401(k) gained popularity as companies switched from defined benefit plans (pensions) to defined contribution, where it became the responsibility of the employee to save for retirement instead of the employer.

Here are the characteristics of the 401(k):

  • Contribution limit is $19,000 with a catch-up of $6,000 for people 50 or older.
  • Total contribution limit, including employer contributions, is $54,000.
  • The 401(k) is an expensive plan to set up and administer, especially when compared to the previous two plans.
  • Like the previous two plans, the 401(k) penalizes you if you withdraw before 59 ½ unless your reason for withdrawal qualifies for an exemption. And you must begin withdrawing funds when you turn 70 ½.
  • With this plan, however, you are able to take a loan out against your savings. This loan has to be paid back, usually in the form of increased monthly contributions.
    • If you are let go from your job while you have a loan on the plan, you will be forced to pay it back with 60 days. If you don’t you’ll be taxed on the amount, and if you’re under 59 ½, you’ll be penalized 10%.
  • This type of plan is designed for larger employers, though there is no maximum or minimum on how many employees you can have.
    • They have a type of 401(k) called the solo 401(k). It has all the same rules and quirks as the standard 401(k), but it’s designed for someone who works by themselves OR their only employee is a spouse.

How to choose

Unfortunately, I can’t say which plan is the best. Each one has its own unique advantages and disadvantages.

When deciding which plan is best for you and your business, there are a few things I would take into consideration.

  1. Number of employees – some plans disqualify you if you have too many employees.
  2. Matching ability – Most 401(k) plans match up to 6%. The SIMPLE requires you to match up to 3% or contribute a flat 2% for every employee.
  3. Cost – Some plans are less expensive to set up and service than others. In terms of the 401(k), the more participants and assets you have in the plan, the less expensive (per user) it becomes.
  4. Attracting talent – More and more employers are using benefits packages to attract employees rather than salary, in what’s called all-in compensation. If you want to get qualified candidates in the door, you have to offer good benefits.

Conclusion

It should be known that whatever you decide, it’s not set in stone. If you set up a SIMPLE and you need to hire more employees than you anticipated, you can set up a 401(k). The SIMPLE will have to stay in place, and you’d just have current and new employees contribute to the 401(k).

For more information on all of these plans and others, read this article here.

Be advised: The numbers and figures listed in this article are for 2019. Contribution limits tend to change over time. Please review the IRS website for up to date information.

Why I Love The Roth IRA

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The Roth IRA started in 1997 and it changed the retirement savings game.

It’s probably my most recommended retirement savings vehicle, other than your employer-sponsored plan of course. You have to get that match!

The Roth IRA can be your primary retirement account or a nice complement to a work-based plan.

Here’s why I love the Roth IRA.

Tax-free withdrawals! That’s right, if you save for retirement using the Roth IRA, you get to take that tax-deferred (don’t pay taxes while money grows) savings out of your account without paying taxes.

While you’re working, you generally have two options (besides contributing to your 401k or Simple IRA) do I contribute to a Roth IRA or a Traditional IRA? The amount of money you make plays a little bit of a factor, as the Roth IRA has an income limit ($137,000 – single, $203,000 – married filing jointly).

However, a back-door contribution is available. That’s where you make a contribution to a traditional IRA and roll the money from there into a Roth IRA. Be advised: You’ll be taxed at the time of the rollover.

That aside, contributions to a traditional IRA are tax-deductible (an income limit applies here). Conversely, contributions to a Roth IRA are not tax deductible.

Here’s why I like to recommend the Roth. I’d save for retirement, without getting that tax-deduction and pay $0 taxes upon withdrawal in retirement. At that point in time, your ability to earn more money is either dramatically reduced or gone completely.

It’s at this point when you need that money the most. I’d rather pay for it now and benefit from it later.

With all that said, I suppose I should list all the characteristics of a Roth IRA.

  • For 2019, the contribution limit is $6,000. If you are 50 or older, you can contribute an extra $1,000. Be advised: these contributions limits change often. Consult the IRS website for up to date information.
  • Because the money in the account was already taxed, there are no mandatory withdrawals. Uncle Sam got his cut already so you can let that baby grow for as long as you want.
  • If you withdraw before 59 1/2, you’ll pay a 10% tax penalty
  • There are exceptions to this penalty, however.
    • Death
    • Disability
    • Use up to 10% on your first home purchase
    • Pay for higher education
    • Medical costs are more than 7.5% of your AGI
    • Can pay health insurance premiums if you’re unemployed
    • The IRS has a tax levy against you
  • You can make contributions for the prior “tax” year up to April 15th.
  • If you withdraw your savings within 5 years of your first contribution, you’ll pay some taxes on your withdrawal.
    • Note: The 5-year clock starts ticking on January 1st of the year you made your first contribution

Conclusion

As I said, the Roth IRA is a great savings vehicle. Whether you use it on its own or use it as a complement to an employer-sponsored plan, it has a place in everybody’s retirement plan.

One last thing I want to mention. My reasoning behind why I recommend the Roth IRA so often is my personal belief. Please use your situation and your money/retirement philosophy when making this decision. It also pays to talk to a professional to see what they’re thoughts are, as well.

Creating A Financial Plan You Can Stick To

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The more I read and the more I meet with people, the more I realize that setting up a financial plan is more than dollars and cents.

Yes, the better financial plans have your typical items. Save this much, invest in these things, and contribute to this retirement plan.

But the best plans not only have this to take care of your financial needs but they’re also set up in a way that your psychological needs are met as well.

Can you stick with it?

The best plan is anyone that you can stick with. When setting up your plan, go through it slowly. Take each item one step at a time and consider possible scenarios when determining a particular section.

For example, when setting up a plan for your emergency fund, figure out what’s realistic for how much you’ll need and how long it will take you to get there.

Also, figure out how it will be replenished if/when it’s ever used. Perhaps you’ll have an automatic deposit setup indefinitely?

Another thing to keep in mind is including some flexibility in your plan. For example, if part of the process is setting up a budget and your weakness is eating takeout, include a little bit of money for it.

I generally advocate for eating your meals at home, but if it’s inevitable that you’ll go out to eat, it’s better to include a little bit of it, rather than trying to avoid it.

Will you gasp every time the market dips?

Investing is a vital part of your financial plan. Investing is what helps your savings grow, but at times, your investments can lose value.

Our psychology plays a big role in our success as an investor. It’s said that we experience the pain of a loss two times stronger than we experience the joy of a gain.

That said, you need to plan accordingly to keep your emotions in check. If you let them take control of your decisions, you could end up selling your investments after you’ve already lost value, at which point it may be better for you to stay in.

Most investable assets are in a retirement plan of some sort, so your time horizon is, more than likely, long-term. 20+ years for instance. Your risk tolerance is the other part to take into consideration.

How much are you willing to lose until you say, uncle? In a six month period, would you have to sell after you lost 10%, 20%, 30%, or more? Your answer to this will help determine what you are able to stomach.

The next thing to do is to stress test your portfolio. The popular investing/research websites will have this. You plug in your portfolio with dollar amounts and ticker symbols, and then (depending on the site) you can select a variety of scenarios to see how your portfolio would do during that scenario.

The 2008 Financial Crisis is a common one.

Conclusion

Creating a financial plan that has the potential to meet your goals is important, and having a plan that you’re comfortable with and one that will help you sleep at night is optimal.

Make sure, when you are developing your plan, that you are factoring in your behavior as an investor and as a human. We are emotional creatures, and that makes investing a little more difficult.

If you’d like to learn more about what was discussed here and for our disclosures, visit our website.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Protecting Assets from Probate

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In a time when your loved ones are grieving, often they are tasked with organizing, coordinating, and sometimes fighting over your estate.

Make it easier on them and plan ahead using some of the tools below.

What is Probate?

Probate is the process by which a deceased person’s will is validated, and the general organization and distribution of that person’s estate.

During probate, if a person died with a will, the court validates the will and then formally appoints the person named in the will to direct (executor) the deceased person’s estate. This includes collecting assets, paying any outstanding taxes and debt, and distributing whatever is left to the beneficiaries listed in the will.

If a person died without a will, the court will appoint an executor to collect the assets, pay the taxes and debt, and distribute the remaining assets according to state law. What needs to be done with any real estate is determined by the county that person lived in.

The probate process is expensive, so anything you can do to speed up the process or avoid it, the better. You will go through probate whether you have a will or not, though it takes a lot more time when the individual died without a will.

Transfer on Death Designation

A transfer on death designation also referred to as a payable on death designation, is something you add to an account so your assets immediately go to your beneficiaries when you pass away without having to go through probate.

A TOD designation can be added to a brokerage account, individual stocks and bonds, and bank accounts.

When the individual with the TOD designation passes, the beneficiaries usually have to create an account in their name in order to transfer the assets.

Will

A will is a legal document, usually created by an estate attorney, in which the individual or couple list who will be the executor of the estate, guardianship of any minor children, arrangements for surviving pets, assets and property owned, insurance policies, beneficiaries, and what is to be done with the assets and property when the creators have passes.

A will lists all of the property and assets, even the ones that do not need further instructions for distribution to the beneficiaries (retirement plans, life insurance policies, TOD designated accounts).

Trust

A trust is a legal entity created by an estate attorney where the grantor (person creating the trust) appoints a trustee (or several) to follow the rules of the trust.

In a trust, the grantor can very specifically list what they want to be done with their assets while they are alive and/or when they pass away. They can list each asset separately and which beneficiary receives that asset or they can list them all at once and pick how those assets will be distributed to the beneficiaries.

They also have the ability to dictate how the care and financing for a minor, or a child with disabilities will be implemented.

Trusts are costly to set up but are a very useful estate planning tool. It’s also the only way to avoid probate, as long as the trust is the owner of the assets.

Life insurance proceeds

The majority of the time, life insurance avoids probate. There are two exceptions, however.

If the beneficiary named in the life insurance policy passes away and there are no contingent beneficiaries, the estate will receive the proceeds. The other is if the estate is directly named as the beneficiary.

Joint ownership

There are two types of joint ownership:

  • With rights of survivorship – when one of the owners dies, the surviving owner receives the decedent’s portion.
  • Tenants in common – when one of the owners dies, their portion is included in their estate. The other joint owner(s) have no right to that portion.

Conclusion

Probate is time-consuming and expensive. For the sake of your loved ones, namely the ones who will be taking care of things when you pass, plan ahead and make things as easy as possible.

I previously wrote an article about where your money goes when you die that goes into much more detail about wills and trusts. Give it a look.

If you’d like to learn more about estate planning, send me an email! I’d be happy to answer any questions you may have.

Please visit our website for our disclosures.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

How much do I need in retirement?

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Conventional advice tells you that, for retirement, you need $1 million to $1.5 million saved, or that you need 10 to 12 times your current annual salary.

For example, if you make $100,000 per year, you’ll need $1 million to $1.2 million saved for retirement.

Are these numbers and calculations good enough? Is there a better, more accurate way to figure out what you’ll need to save for retirement?

In this post, we’ll look into that and more.

Check out retirement calculators

There’s a huge number of them out there. I recommend trying a few different ones, that way you can compare and average out the numbers. They’ll ask you things like age, current savings, current income, future contributions, etc.

Here are a few of the better ones.

Using some or all of these calculators, you can probably get a good idea of where you’re at currently, how to improve, and where you’ll need to be at the end.

What are the factors?

There are a variety of different factors at play. You’ll have different expenses and different income levels, and some of those numbers won’t stay steady throughout retirement.

For example, a couple’s health care costs in retirement are said to be $275,000 (Source). However, not all of that will hit you in the first few years of retirement.

More than likely, you’ll have minimal costs in the beginning, and they’ll slowly increase as you age.

Where will you live?

This can be a huge variable in retirement. Its widely known that different areas of the country have a higher cost of living. San Francisco is more expensive than Lincoln, Nebraska.

Another important factor regarding your living situation is if you have a mortgage or not. No mortgage means fewer expenses, which is less going out of your pocket, and more that can be saved for the future.

Not having a mortgage can also give you some leverage. If you decide that your current home is too big and would like to downsize, you can use the proceeds from the sale of your previous home to, hopefully, buy your new one outright.

Living Expenses

We’ve talked briefly about health care expenses during retirement and we talked about housing. Without a doubt, these are the two largest expenses during retirement. There are a few more to consider, however.

  • Transportation – did you relocate? Or do you have family in other parts of the country? Transportation and lodging need to be taken into account when figuring out your expenses for retirement, especially if you’ll be traveling regularly.
  • Entertainment – you might be looking for something to fill your time. It could be filled with expensive hobbies or other activities. If you are looking for something to do, or are looking to start a hobby, be sure your budget will allow for it.
  • Remaining expenses – the leftover expenses are ones you deal with right now (food, clothes, utilities, bills, insurance, etc.)

A budget is just as important in retirement as it is now, if not more so. Keeping track of your expenses and your income is very essential to your finances during retirement.

You often hear people in retirement say they are on a fixed income. What that means is they have lost their ability to earn more money. What they have is it. If you are spending more than your savings and your income allows, you are setting yourself up for failure.

Income

Your income from retirement could come from a variety of places.

  • Social security – provided by the government. The normal advice regarding social security is that it shouldn’t replace more than 40% of your income. Meaning 60% should come from another place. Your monthly payout from Social Security does increase the longer you delay taking it, and the reverse is true if you take it early.
  • Pension – these are becoming less and less popular as time goes on. They were huge back in the day when workers would stay with one company until they retired, but because people switch jobs so often nowadays, employers don’t want to take the chance. If you have one, consider yourself lucky.
  • Retirement savings – more than likely, this is where the other significant portion of your income will come from. This is where having a financial advisor is beneficial because you have to use enough of your savings to afford your retirement, but not too much so you don’t run out of money. Tricky.
  • Other areas – there can be other sources of income during retirement. You could have some dividend or interest income from your investments, you could work part-time to stay active and earn a little extra, or you could possibly have a rental property or several.

If you want to learn more about where your income could come from in retirement, click here.

Wherever your income comes from, it’s important to coordinate effectively so you maximize your current income without jeopardizing your savings.

What will you do in retirement?

How you spend your time will also have a huge effect on your expenses.

If you plan on spending most of your time with your grandkids, retirement could be more affordable than if you planning on golfing a few times per week. Although it could quite possibly be much more expensive than golf, we all know how grandparents are with their grandchildren.

If money is tight and you are looking for things to fill your day, there are many free or low-cost activities available to you.

  • Volunteer – not only is this a free activity. You’ll feel useful, you’ll get to use your brain, and you’ll have a sense of community, all are shown to increase longevity.
  • Go to the park – take a walk, bring a book, or just interact with nature and the community.
  • Community center – not all municipalities have one, but go to your local community center or go to your municipality’s website. There you will find local events, most of which are free.
  • Discounts – most places offer senior discounts. If you aren’t offered one, make sure you ask for it. This really could save you a lot of money on activities, food, etc.

How long will you live

The most depressing point in this post, but one of the most important. Unfortunately (or fortunately, depending on how you look at it), no one knows how long we are going to live for.

One way to get a little indication, but not really, is your family history. If your grandparents or parents lived into their 80s, 90s, or 100s, the chances of you living a long life are a little higher.

On the flip side, if most of your relatives passed away in their 60s or 70s, your odds of living into your 80s and 90s are lower.

However, this really is no indication on how long you’ll live for. One of the most important things you can do for yourself is to live a healthy lifestyle. Take a walk once or twice per day, do something daily that will engage your mind, interact with friends and people in your community, and eat better.

The 4% Rule

You’ve probably heard this before too. Here’s what it is. Once you retire, you withdraw 4% of your retirement savings every year. This is considered a safe withdrawal rate, as the withdrawals would consist mostly of interest, dividends, and unrealized gains from your investments.

Let’s say you have $1 million saved for retirement. The 4% rule would allow you to withdraw $40,000 per year. All else staying the same, you have 25 years worth of withdrawals using this method. Be advised that no growth was factored into this calculation.

Conclusion

I suppose you’d like an answer to the question we proposed in the beginning. Here it is. It depends. It depends on your current and future expenses, it depends on where you’re income will come from, it depends on how much income you expect (outside of retirement savings), and it depends on how you live your life during retirement.

Most importantly, you need to work with a financial professional, ideally someone that specializes in retirement planning.

To learn more about retirement planning and for our disclosures, visit www.crgfinancialservices.com.

Where to Find Free Financial Planning Classes

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If you’re new to financial planning and you want to learn how to manage your finances on your own without hiring a professional, there are a few places you can find the information you need. And, it’s free. Fortunately, there are a number of free online courses that can help you learn what you need to know. Here are some of the best ones I’ve found.

CNN Money – Money Essentials

This is one of the best resources for money advice, tips, and learning. It includes 29 lessons with everything from setting goals to managing debt to home ownership and insurance, all the way through to retirement planning. Pick and choose just the topics you need or the things you’re most interested in learning now. It even includes glossaries of terms you need to know and quizzes to help make sure you’ve learned what you need. And best of all, it makes learning easy.

Money Management International

Money Management’s online Financial Education site offers a variety of tips for long-term planning and short-term needs. If you want to know how to save money on holiday shopping or how you can earn more money, they’ve got you covered. Need information on bankruptcy, credit reports, and understanding your credit reports? That’s there too. Need help with a home loan or debt management? It’s all there. Even tips on teaching your kids about financial matters.

University of California-Irvine’s Fundamentals of Personal Financial Planning

This online course offers lessons on creating your financial goals, doing the math to figure out what you need, creating a financial plan, and getting started with your plan. Once you have a plan together, it will help you figure out things like insurance, long-term care, social security, and medical care. Like the other courses, you can start anywhere you’d like and skip the courses you don’t think you need or aren’t ready for yet. Even though this is a college-level course, it was designed to help regular consumers at all levels of their financial education make better informed decisions about their money.

Purdue University’s Planning for a Secure Retirement

This 10-module course will help you plan your retirement to make sure you have all the money you need to get through. It includes several helpful tools to help you plan including personality profiles and risk tolerance calculators. This course is at-your-own-pace and it’s easy to understand no matter your financial education level.

The American Financial Services Association Education Foundation’s MoneySKILL

This course is designed for those who are new to financial planning to help you gain a basic understanding of money management. It covers topics like income, expenses, savings, investing, building credit, and obtaining insurance. It’s a high school and college level course to teach teens and adults alike the basics of money management and planning.

Learning what you need to know about financial planning can seem overwhelming and confusing, but with free courses like these that teach you everything you need to know in an easy to understand manner, there’s nothing to stop you from becoming financially independent.

 

Best Free Financial Advice

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Growing up, I was never taught about personal finances. Sure, I knew that money could buy you things, but that was the extent of my financial knowledge. When I graduated college, I had to teach myself everything about finances from scratch. Living on a small post-graduate income, I didn’t have lots of money to invest in financial courses and books. Thanks to the wealth of information on the Internet, I didn’t have to! Here is a list of the best free financial advice that I’ve learned in the years since graduating.

Spend less than you earn and get on a written budget.

Before you can become rich, it’s absolutely critical that you spend less money than you earn and get on a written budget. Ideally, you would not want to be living paycheck-to-paycheck but have some extra money in your budget each month.

Minimize debt.

Some people believe that debts such as mortgages and student loans are “good” debt, while some do not. Either way, any debt you have means you owe money to someone else and will (most likely) be paying interest on that debt. The less debt you carry, especially the high interest ones such as credit card debt, the more money you will have to invest. I personally am working towards being 100% debt free.

Save for emergencies.

It’s a fact of life: hard times are going to come. Be prepared for them by saving money in an emergency fund so you won’t have to go into debt to cover the emergency. I was so thankful I had my emergency fund when my car broke down recently. Financial guru Dave Ramsey recommends having $1,000 in your emergency fund ($500 if you’re low income), but I’m personally not comfortable with less than $1,500-$2,500 in a starter emergency fund. My eventual goal, once I pay off debt, is to save 3-6 months’ worth of living expenses in my emergency fund.

Diversify your investments.

When I was younger, I heard an elderly neighbor say something along the lines of “Don’t put all your eggs in one basket.” I always thought it was about just planning on only one outcome, but as I learned more about finances I realized the saying applies for it as well. I’ve heard stories of people who invest entirely into one stock, and when the stock market crashes their investment is entirely wiped out. Spreading your investments across a variety of assets is less risky.

Think long-term with your investments.

You know the saying “Rome wasn’t built in a day”? Well, the same is true for your finances. You won’t become a millionaire overnight, but by investing in retirement funds and mutual funds and thanks to the magic of compound interest, over time you can build up your net worth. I recommend investing 10-15% of your income into retirement and other investment accounts. If you can’t start with that much, start with as much as you can afford, even if it’s just a small amount. If your employer offers a match for a 401(k) or 403(b), I definitely recommend investing the maximum matching amount– otherwise, it’s like turning down free money!

Earn more.

I decided to work part-time in addition to working my full-time job (aka “side hustling”) when I decided I wanted to get out of debt. I love it! It allows me to gain work experience outside of my day job, plus it allows me to pursue something I’m passionate about—writing and inspiring others (through my blog.) Side hustle money can be used for anything from investing to paying off debt to travel.

Money isn’t everything.

Billionaires Warren Buffett and Bill Gates created the Giving Pledge, which encourages other billionaires to give away half of their earnings to charity. Buffett even went so far as to pledge to give away 99% of his wealth in his lifetime or within 10 years after his estate is settled upon his death. I love that idea. As much as I love finances, at the end of the day, it’s just money. You can’t take it with you when you pass away. This is why I believe in giving a portion of your income to charities and others in need.

 

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Financial Planning Series – Estate Planning

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You may think you’re too young to think about estate planning; or maybe you think it’s not something you need to worry about yet, but the fact is, if you have any assets, you need an estate plan. As you acquire more assets, you’ll need an improved estate plan to make sure your loved ones are taken care of.

In many states, if you pass away without a will, the state will take your assets and let a court decide who should get what. That often takes several years, causing your family financial difficulties until it’s resolved. Here are the steps you should be taking to create an estate plan that will protect your family.

Make a will.

This is non-negotiable and has nothing to do with how much you have. A will directs who will inherit your property, how it will be divided, and if you have young children, it will name a guardian for them if your spouse has passed away as well. Whatever else you do or don’t do with your estate planning, get a will to protect your loved ones. You will also need to name an executor, the person who will handle the distribution of your property and filing tax returns on behalf of your estate. They will also handle any claims from creditors.

Consider a living trust.

You may or may not need a trust, but depending on your assets and the age of your heirs, you may want to consider it. A trust is allows you to put conditions on how and when your assets are to be distributed. For instance, you can state that your children don’t inherit until they are 25 with the exception of educational expenses.

Create a health care directive.

A living will helps you maintain control of the type of medical care you desire. For instance, if you are injured and have severe brain trauma and are declared brain dead, a living will helps the doctors know what you would want them to do for you. Would you want to be kept alive or would you want life support discontinued. In most states, without a health care directive, the doctors or the courts will make the decision which can take a long time, all the while racking up more hospital bills for your family.

Have a power of attorney drawn up.

This will protect your assets if you are incapacitated for a short period of time. If you should injure yourself and you’re unable to take care of your financial responsibilities for a short time, the POA will allow the person you direct to pay your bills from your account for you.

Write a letter.

Wills do not usually allow for funeral arrangements or other personal requests. Write a letter to your family letting them know your final wishes, like the type of funeral you would like, and give it to a trusted friend or keep it in a lock box with your will. Be sure to let someone know where it is.

Speak to a tax attorney or accountant.

Be sure you know the tax laws about inheritance and get professional help to ensure that your heirs will be able to avoid paying estate taxes.

File beneficiary forms.

Your bank and/or investment accounts should have a beneficiary form that you can fill out, designating who should receive the funds. This will allow your heirs to access those funds quicker, without having to go through probate. Many banks have a “pay on death” form that is similar to a beneficiary form which allows your heir to simply transfer the account holder to themselves.

Last, but not least, in this day and age you will also need to consider digital files. Keep a list of your accounts and passwords so your family will be able to easily access your online accounts and close them out without hassle.

Planning for your death is something we’d all prefer not to think about, but sooner or later, we will all pass away and isn’t it more comforting to know that your family will be taken care of.

Financial Planning Series: Retirement Planning

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Retirement planning can be a bit confusing, trying to figure out what you will need and how to plan when you’re not even sure yet what your lifestyle will be and how long you will need to live on savings. But there are two things you can know for sure … first, you are never too old or too young to start planning and second, you will definitely need a retirement plan.

Knowing those two things, it may surprise you to also know that less than half of all Americans have taken the time and steps to start saving for retirement and that 30% of people who work in private industry and have access to a 401K or other savings plan do not participate. Considering that the average American lives in retirement for about 20 years and Social Security is not guaranteed, it’s time to take retirement planning seriously.

Here are some tips for getting started:

Start saving and keep saving.

If you’ve already started saving, great! If not, it’s time to work a savings plan into your monthly budget. Look for savings options that pay interest, are tax-free, and keep your money out of easy access. You don’t want to be tempted to dip into your savings.

 

Calculate what you need as best as you can.

Experts estimate that you will need at least 70% of your preretirement income annually to live if you’re making a 6-figure income. If you’re making less, you’ll need closer to 90% of your income to maintain your lifestyle. That is based on your home being paid off. If you’ll still have a mortgage in retirement, you’ll need to plan for 100% of your preretirement income. Keep in mind that your medical expenses will likely increase in retirement as well.

 

Determine how you will meet those expenses.

Include your pension, investments, Social Security, and any income you will continue to receive like payments from rental properties. If you’re not sure what you can expect to receive from Social Security, request a copy of your benefits estimator from the Social Security website. On average, you can expect to receive 40% of what you earned before retirement based on your seven highest-paid years. Your benefits will vary though depending on when you take benefits, so that’s important to calculate when determining when you plan to retire. You will receive fewer benefits if you start taking them at 62 than if you hold out and take them at 65.

 

Now that you know what income you can expect to receive after your paychecks stop, you’ll need to fill the gap with your savings. Knowing how much you will need to live on for at least 20 years and how much you will have coming in, you should be able to figure out what you’ll need to fund your retirement nest egg.

Planning for retirement doesn’t have to be confusing; it just involves a few calculations. Calculate your expected expenses and your expected income for the years you plan to live in retirement, determine the difference, then make a plan to start saving so you reach your savings goal before you reach retirement.

 

Financial Planning Series: Basic Income Tax Plannin

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New to financial planning? Start with the overview. Then understand cashflow, learn about insurance planning and risk management, or pump up your investment planning.

As your income and investments grow, so will your tax responsibility. After all, Uncle Sam wants a little bit of your good fortune too! There are a few tips and tricks to lowering your tax responsibility though and they can really help you out when it comes time to file. However, you don’t want to wait until April 14th to start looking for deductions. You’ll need to start sheltering some of your funds before the end of the year to qualify for them.

Here’s what you need to know when it comes to basic tax planning:

Plan Your Deductions

You have a choice between standard and itemized deductions when it comes to determining your taxable income. A standard deduction is pretty straightforward, it’s a dollar amount set by that government that you can claim without calculating any expenses that typically make up an allowed deduction. Itemized deductions on the other hand are just what they sound like, an itemized accounting of actual expenses allowed for deductions. If your expenses over the year are more than the standard deduction amount, you’ll want to go with itemized deductions. You’ll pay less tax and get a larger refund.

One thing to keep in mind though, itemized deductions require proof of expenses so you’ll need receipts and any other documentation showing these expenses or they won’t be allowed. If you believe that the itemized deductions will work in your favor, be sure to set up a good filing system for holding on to your receipts. Regardless of which deduction method you choose, it’s always a good idea to hold on to receipts so that you can make a better decision come tax time.

Retirement Savings

Retirement accounts are a great way to reduce your taxes as well as have income for the future. A qualified individual retirement plan can create a tax shelter of income that is not taxed. For instance, at a 25% income tax rate, depositing $15,000 into a qualified retirement plan can save you $3,750 on your tax return and you won’t pay taxes on your deposit until the money is withdrawn. If you wait until the required age for withdrawal, you’ll even avoid paying most of the taxes on these deposits. There is a maximum allowance for yearly deposits into these accounts though so be sure you know what the limit is for the fund you select.

Other Savings That Are Tax-Sheltered

There are a few other options for saving money and getting deductions that allow you to defer or even avoid paying taxes altogether.

Health Savings Accounts including medical savings accounts and flexible spending accounts can be funded by you or your employer, or both. Both contributions and withdrawals are tax-free.

529 College Plans are funded with after-tax deposits and qualifying withdrawals are also tax-free. The 529 Plan allows you to choose with a prepaid tuition plan or an education savings plan.

Dependent Care Savings are flexible spending plans focused on helping you pay for childcare while you are working. They are held in separate fund and qualifying deposits and withdrawals are tax-free.

Keep in mind though that any withdrawals made from these accounts that are not for a qualifying expense are taxable at the time of withdrawal.

Tax Credits

Be sure to look for tax credits that apply to your financial situation; they’ll help reduce your tax and can even give you a refund. A few to look for include:

Earned Income Tax Credit is for low-income earners. Your annual earnings, filing status, and number of dependents will determine if you qualify.

Child and Dependent Care Credit helps cover childcare and/or disabled dependent care when you are working.

American Opportunity Credit helps cover some of the costs associate with post-secondary education during the first 4 years of college. There is a maximum credit of $2500 per student and 40% of the credit is refundable.