In my previous post, I wrote about Roth conversions. The focus there was on the traditional type of conversion where an investor moves funds from a traditional IRA to a Roth IRA. Today, I will discuss a different type of Roth conversion called the backdoor Roth conversion. The traditional Roth conversion is suitable and even advisable for a large number of people. The backdoor conversion serves a more narrow audience but can still be a very powerful tool for those in position to take advantage of it. If you try and google a backdoor Roth conversion you will find varying definitions and descriptions. Some will refer to the ‘backdoor’ component as simply converting traditional IRA funds to a Roth which is really just a straight forward Roth conversion that is available to everyone. The backdoor Roth conversion I will discuss here is a way for high income investors to bypass the income limits on making annual Roth conversions. In my post on Roth IRAs, we discussed the annual limit of contributions of $6,000 for people under age 50 as long as their income is under certain limits, currently $206,000 at the highest, depending upon tax filing status. So while traditional Roth conversions are usually made in bulk sums they don’t address the ability to make annual contributions to a Roth plan for high earners. That’s where the backdoor Roth conversion comes into play. Why would someone want to do this? While contributing to a Roth in high earning years may not seem to make much sense due to the high taxes you will have paid on the money contributed, think about what your other options are for investments. Assuming you have maxed out your 401k first, where else do you go? A Roth is a better option than a taxable account which has after tax contributions and capital gains taxes on the back end. I also prefer a Roth to any of the tax sheltered insurance related options such as forms of permanent life insurance and annuities. Here is how it works. Assume your family AGI puts you over the $206,000 threshold for being able to make contributions to a Roth plan. You probably also make too much to make a tax deductible contribution to a traditional IRA. But, you can always make a non-tax deductible to an IRA regardless of your income. So step one is to make that non-deductible IRA contribution. Note, this will be after tax money. Step two, convert this non-deductible IRA amount to your Roth account. So, what are the benefits? This allows a high earner to make annual Roth contributions. No tax owed on the conversion since it was taxed before entering the IRA. Enjoy tax free growth on the converted amount. Provides tax flexibility by allowing a high earner to have not just tax deferred income in retirement. Sounds great, let’s do it! To quote the great Lee Corso, “Not so fast my friend.” There are some major strings tied to the backdoor conversion you need to be aware of before trying one and they are significant. Annual limit on the contribution limit. IRA contributions are limited to $6,000 per year for people under age 50 and $7,000 for those 50 and above. So, for a high earner this can be a somewhat complicated process to go through for a $6,000 contribution. But, that tax free growth can be worth it. Pro-rata rule. This is the big one and can frankly make this a non-starter for some people. The pro-rata rule states that when making a Roth conversion you must make the conversion in the same ratio as what you have in pre-tax vs after-tax money in your IRA. For example, let’s say you have $54,000 in an IRA from a 401k rollover. You now have added you $6,000 after tax contribution and try to do a $6,000 Roth conversion. That leaves you with an IRA balance of $60,000 (90% of which is pre-tax and 10% after tax). The pro-rata rule prohibits you from cherry picking that specific after tax $6,000 for conversion. Instead, your $6,000 conversion is going to be made up of $5,400 pre-tax and just $600 of that after tax contribution. Since 10% of your IRA balance is made up of after tax contributions you are limited to 10% of the converted amount to be after tax. This can be a deal breaker for those that already have large established IRA balances as you will have to recognize the income and pay taxes on the non after tax amount and may only be able to convert a small potion of your after tax contribution. Taxes owed on gains. If there is a lag between the time the after tax contribution is made and the conversion takes place, the principal that was contributed may have gains associated with it. These gains will be considered ordinary income when converted along with their principal. So who should be trying to take advantage of the backdoor Roth conversion? This conversion makes sense for people meeting the following criteria: High income earners Maxed out their 401k and still have funds to invest No previous IRA balance The limitations due to the smaller amounts that are converted and the specific criteria needed to be met for the conversion to be beneficial make this an option that a limited number of people can take advantage of. While the backdoor conversion may not be quite as powerful a tool as traditional Roth conversions due to these limitations, it is still an option for high earners that allows access to annual Roth contributions they would otherwise be prohibited from making and there can be significant value in that. That wraps up our overview of backdoor Roth conversions. I hope you found this informative and helpful for your understanding of personal finances. As always, if you are wondering if this makes sense for you and your specific circumstances please reach out to me at or check out our website at and provide your contact information. Thank you for reading and I hope you check out our next topic which will be on one final type of Roth conversion, the Mega Backdoor Roth Conversion. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, 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. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
In the previous post, I discussed the key facts you need to know about Roth investment accounts. In this installment, we’ll switch to discussing Roth conversions. Specifically, what they are, the benefits of doing one, and when they make sense to do. A Roth conversion is a great tool that savers have at their disposal to take advantage of different tax rates throughout their life. In the previous posts covering traditional IRAs and Roths, we specifically discussed the tax treatment of both contributions and withdrawals. Understanding this is critical to knowing why Roth conversions are a valuable option for you. First, let’s start with understanding what a Roth conversion is. A Roth conversion is the process of moving funds from a traditional IRA account into a Roth IRA and in the process recharacterizing the funds from a tax standpoint. To do this you need to have opened both a traditional IRA account that is funded and a Roth IRA account (this account does not have to be funded). As we learned about traditional IRA accounts, withdrawals are treated as taxable income, and the same applies when doing Roth conversions. Any amount that you convert from a traditional IRA to a Roth will be added to your taxable income for the year and be taxed at your marginal tax rate. For example, if a married couple with a taxable income of $100,000 does a Roth conversion in the amount of $25,000, their taxable income increases to $125,000. As this income is in the 22% range, they would owe $5,512 in income tax on the amount that was converted. So why would someone want to do this if you have to pay $5,500? The reason is that the $25,000 now in the Roth account will grow tax-free and won’t be taxed a t the time of withdrawal either (assuming rules are followed for qualified distributions). That can be a very compelling reason. This $25,000 growing at 6% over 20 years will grow to just over $80,000. This $80,000 is now tax-free for the couple when they need it in retirement. There are other advantages as well to doing Roth conversions: Reduces amount in IRA which in turn reduces future RMDs and the corresponding taxes Roth IRAs are not subject to RMDs so provide flexibility with an option for tax-free retirement income planning Roth IRAs provide a way to pass assets to your heirs without them owing taxes Provides a workaround for IRS income limits on being able to contribute to a Roth This chart below shows the financial benefit of doing a series of Roth conversions and how it shifts the balance over time from the IRA to Roth account and how that will reduce future RMDs and related tax liability. So why wouldn’t everyone do this? One, you need to pay those pesky taxes in the year of the conversion and you may not have the cash to do that. Second, it may not make financial sense, believe it or not, given your current circumstances. Ideally, you can take advantage of Roth reconversions when you are in periods of paying low tax rates. Let’s walk through a few scenarios using our same couple from before. 1. Let’s adjust the couple’s income to $50,000 which is in the middle of the 12% tax rate. Converting $25,000 still keeps them in the 12% tax bracket. Let’s assume they are both 35 years old and that as time goes on their income increases and prior to retirement their income grows to $200,000. Between what they were able to save and Social Security, their retirement income projects to be $175,000 which is in the 24% tax bracket. By doing a Roth conversion when they did they were able to pay 12% in taxes on the conversion to later avoid 24% on the withdrawals. That is a great scenario for doing a Roth conversion. 2. Now let’s assume our same couple is age 50 and are in their peak earning years. Their income has grown to a combined $350,000 which puts them in the 32% tax bracket. They now have an expected $225,000 retirement income. Doing a Roth conversion at this point and paying 32% on the conversion to avoid paying 24% later does not make much sense. 3. Our couple is now making $170,000 and expects to have $125,000 in retirement income. The $170,000 current income is in the 22% tax bracket as is $125,000 retirement income. But, the $25,000 Roth conversion is additional income which pushes their current income to $195,000 and the incremental $25,000 is almost all in the 24% tax bracket. In this case, they would pay the higher rate on almost the entire conversion amount. The basic premise boils down to taking advantage of lower tax rates now compared to projected future higher rates. The best way to do this is when you are in a lower tax paying year to try and fill up the lower tax bracket with Roth conversions. In our first scenario listed above, the couple has $100,000 of taxable income. The 22% bracket goes all the way up $171,500 in 2020 meaning if possible they could convert $71,500 and still be in the 22% tax bracket. Here is a list of times in life that a Roth conversion might make sense: Early retirement. Say you retire at age 60. You are not yet eligible for Social Security and do not have to start taking disbursements from your IRA/401k accounts. This can be a period of lower income and can be a perfect time for Roth conversions. Take a couple that retires at age 62 and is planning to live off money in their savings account and investments from a joint taxable account. The savings money can be used tax free and the taxable account will only result in income to the extent of the capital gains. Say this results in $25,000 in taxable income. That still leaves $55,000 of room to do Roth conversions and stay in the 12% tax bracket. Early career. When starting your career your salary tends to be lower than it will be later in your career and as a result likely puts you in a lower tax bracket. Economic hardship. This one can be tough because at a time when your income is lower due to a job loss or other economic conditions, volunteering to pay additional taxes for a Roth conversion may not seem like a smart thing to do. If other areas of your finances are intact though and you can ride out the temporary dip, the timing might be right. Expected tax increases. In 2018 Congress passed the law to reduce our tax rates. One thing many people may not know is these lower rates are set to expire after 2025. That means all rates across the board may go up at all income levels. Income is at the lower end of the tax bracket. This is especially important when there is a large increase in the rate of the next tax bracket. There isn’t a huge difference between $80,250 up to $326,600 which covers both the 22% and 24% tax brackets. Contrast that with $80,250 which is the tipping point between 12% and 22% brackets. Likewise $326,600 is the tipping point between the 24% and 32% brackets. If your income is at $200,000 you have $126,600 remaining in the 24% bracket to take advantage of conversions. Compare that to if your income is at $315,000 which only leaves $11,600 in the 24% bracket. Any conversion amount greater than $11,600 will be taxed at the much higher 32%. There is one important caveat to know with Roth conversions and it is called the 5 year rule. Any amount converted to a Roth must be in the Roth account for a period of five calendar years in order to avoid the early withdrawal penalty and have earnings taxed. Five calendar years only means that the funds have to be in the account covering five different years not five full years. For instance, a conversion made in December of 2020 covers all of 2020 meaning a withdrawal in January of 2024 counts as year 5. This holds true for each conversion performed. Once an individual turns 59 ½ the five year rule no longer applies. The Roth conversion can be a very powerful option in your financial planning toolkit. If used correctly you can pay a lower income tax rate on your contributions and get to take advantage of the huge benefit of tax free growth. You just need to know when to do the conversion so you can take advantage of the benefits it can provide. If you are interested in understanding if you are a good candidate for a Roth conversion drop us a line at email@example.com. I hope you found this helpful and informative. Look for the next post where I will continue discussing additional forms of Roth conversions, the backdoor Roth conversion, and the Mega backdoor Roth conversion.
Financial Planning 101 - What You Need to Know About Roth Accounts
It has been a while since my last blog post on traditional IRA accounts. There have been quite a few changes in the world since then and I have put a focus on trying to deal with issues related to COVID-19 and its fallout. As a result, the blog activity was put on the back burner. While COVID continues to dominate our national discussion and there is much uncertainty on how and when we can get back to a sense of normalcy, there are planning opportunities that have been created as a result, and those need to be discussed. One of the biggest financial planning opportunities that has been created is the increased potential benefit of Roth conversions. Before getting into conversions, though, let’s understand what a Roth account is first. To do that we’ll discuss how Roth accounts are different from other accounts and the pros/cons of this type of account. Remember that the 401k and IRA account contributions are pre-tax, meaning that the contributions are removed from your income before they figure out the income tax calculation. On the back end though all distributions, including both contributions and earnings, are all fully taxable. With a Roth plan it is just the opposite. Contributions are post-tax but all distributions, including both contributions and earnings, are tax-free. Here is an example of how this works using simple math (actual tax rates and amounts would be different due to tiered tax rates). Say your salary is $100,000 and you want to contribute 10% ($10,000 in this case) to a Roth and are in a 22% tax bracket. Your $100,000 is taxed at 22%, or $22,000, leaving you with an after tax amount of $78,000. The $10,000 Roth contribution then comes out of the $78,000 leaving you with a net of $68,000. In comparison, a 401k would take the $10,000 contribution from the $100,000 leaving $90,000 to be taxed. At 22% this would be $19,800 leaving a net of $70,200. So while the 401k might leave more money in your pocket right away the Roth makes up the difference when you withdraw the funds by not paying taxes at that time. Here’s how it works on the back end. Let’s say in retirement you withdraw $50,000 and are in the 12% tax bracket. If you withdraw the funds from an IRA or 401k you would have to pay 12% in taxes on that $50,000, leaving you with a net of $44,000. If instead the funds were a qualified withdrawal from a Roth IRA or Roth 401k the entire $50,000 would be tax-free leaving a net of $50,000. Qualified Distributions One key thing to note with Roth accounts is that your contributions can always be withdrawn tax-free as you have already paid income taxes on the money used for contributions, but the earnings need to meet certain criteria to be withdrawn tax-free. The Roth account must have been open for at least five years and the individual must be at least age 59 ½. There are exceptions to this which include distributions for the following: certain health insurance and medical expenses; higher education expenses, up to $10,000 towards a first home or to meet an IRS levy. Non-Qualified Distributions Any distributions not meeting the criteria listed above or for one of the exceptions incurs the same penalty as an early distribution from an IRA/401k which is a 10% penalty in addition to the distribution being considered taxable income. Important things to know If your employer offers a 401k plan with a Roth option you can split your contributions between the traditional 401k and the Roth however you choose. One thing to note is that your employer match will be placed in the traditional 401k account. So if you are looking for a specific split between the two types of accounts you will want to take the match into consideration as well. Contribution limits are the same with a Roth 401k as they are a traditional 401k, $19,500 for 2020 plus an additional $6,500 catch up if over the age of 50. This contribution limit can be split between the traditional and Roth accounts. They are also the same for a Roth IRA and a traditional IRA which is $6,000 plus an additional $1,000 if over age 50. There are income limits for being able to contribute to a Roth IRA account. Phaseout ranges are $0-$10,000 if married filing separately, $196,000-$206,000 if married filing jointly and $124,000-$139,000 for everyone else. There are no income limits for contributing to a Roth 401k. When does a Roth make sense compared to other investments? The decision to use a Roth account compared to a traditional IRA/401k account really comes down to current vs. future tax rates. Ideally what you want to do is use whatever type of account today that will help you avoid the higher tax rate you will experience in working years compared to retirement. If your income is lower, and are therefore in a lower tax bracket, it makes sense to pay the tax now on your income, invest in a Roth, and then enjoy the tax free growth. This is usually the case for people earlier in their career or maybe in a down economic cycle like we are in now. For example, a young worker is making $50,000 and is in a 15% tax bracket. They anticipate growth in their career and earnings, which should hopefully result in a nice sized nest egg for retirement. As a result of their various savings and income sources they may find themselves in a 24% tax bracket in retirement. In this case, it would be smart to be in a Roth, pay the 15% taxes now, and then enjoy tax free distributions that would avoid the 24%. Likewise, the traditional IRA/401k makes more sense when your income is higher. Someone in their peak earning years might be making $350,000 per year which puts them in a 32% tax bracket and upon retirement is anticipating $150,000 of income from various retirement sources which places them in the 22% bracket. In this case, it makes sense to avoid paying the 34% today and, instead pay the 22% in retirement. Finally, a Roth makes sense in general as a future tax rate hedge. While we don’t know what future rates will be we do know that the current tax rates which were introduced in 2016 are set to expire in 2026. Those expiring lower rates combined with a concern that our growing debt will require higher future tax rates might make all current tax rates attractive to what may await us in the future. This wraps up the basics of Roth accounts. I hope this helps explain the basics of the plan to you. If you have questions on whether a Roth is right for you reach out to us at firstname.lastname@example.org. I’ll try to get back on a regular schedule with the blog. Look for the next installment on Roth conversions. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, 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. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
Financial Planning 101 - What You Need To Know About IRAs
Last post we talked about 401k plans. In this edition, we will focus on IRA (Individual Retirement Account) accounts which are the next most popular type of retirement account. There are over 36 million of these accounts in the U.S. according to the IRS containing $9.8 trillion which is nearly one-third of all retirement assets. For the most part, the key attributes of IRA accounts are very similar to 401k plans. I won’t get into the details of explaining again the various terms, for that you can refer to the previous post. There are some differences though and I will highlight both the key similarities and differences here. IRAs are typically funded in one of several ways. It can either be someone’s primary retirement savings account if they don’t have access to one from an employer, as a supplement to their 401k or as a result of a 401k rollover. Key Similarities · Like the 401k, the IRA is a retirement plan where people can contribute pre-tax dollars that grow tax-deferred. · Withdrawals before the age 59 ½ (with a few exceptions) incur a 10% penalty. · RMDs are mandatory starting at age 72. · All withdrawals are considered taxable income. · Both 401k and IRA accounts may have a Roth option. Key Differences · As the title states the IRA is an individual account. This is not an employer sponsored account. These are accounts you can open on your own at a brokerage firm like Schwab, Vanguard or Fidelity or with an advisor through their firm. · The contribution limits for an IRA are much lower than those for an IRA. For 2020 the contribution limit is $6,000 and the catch-up amount is an additional $1,000 compared to the $19,500 and $6,500 for the 401k. · The $6,000 contribution limit is tied to that amount or your earned income whichever is less. · Unlike a 401k there are income limits for being able to make tax deductible contributions to an IRA. For those who are participating in a workplace retirement plan the ability to deduct your contributions phase out between $104,000 and $124,000 for those filing taxes as married joint. The phase-out is 0-$10,000 for those filing married separately. For those individuals who are don’t have access to a workplace plan but are married to someone who does, the phase out is $196,000 - $206,000. If neither spouse has access to a workplace plan then there is no income limit. · Since an IRA is not an employer plan the contributions do not come directly from your paycheck and do not need to be consistent. Contributions can be made periodically or even in one lump sum. · Contributions can be made by April 15th of the following year and still be used a deduction for income tax purposes for the previous year. · For a traditional IRA account there is no employer match since, again, it is an individual account. This combined with the lower contribution limits can make it difficult to accumulate a larger balance as quickly as one can with a 401k. · There are no vesting timetables for IRA accounts. Since all of the contributions came from you all of the funds are yours immediately. · One major upside for an IRA is the amount of investment options that are available. Whereas a 401k has a limited number of mutual funds to select from, an IRA can have an almost unlimited number of investment options. Almost any investment option that is available through your custodian are fair game in an IRA. This includes a choice of thousands of mutual funds, ETFs and individual stocks and bonds. Rollover of 401k to IRA When workers leave their job they have several options on what they can do with their 401k plans. 1. Choose to leave it with your former employer 2. Cash it out – If you select this option be aware that the entire amount will be taxable income to you and if you are under age 59 ½ there will be an additional 10% penalty. 3. Roll it over to an IRA. The best way to do this is via a direct rollover. This is where the funds from your 401k plan are sent directly to your new IRA custodian. This way you avoid the rollover being considered a withdrawal and subject to income taxes and penalties. If the funds are sent to the account holder there is a 60-day window to forward on to the new custodian to avoid taxes and penalties. Otherwise, the entire transfer amount will be considered the same as a cash-out. Changes with SECURE Act Right before the end of 2019 Congress passed and the President signed into law the SECURE Act which contains some rule changes to how these plans are used. Here is a summary of the key updates: · The age cap for contributions was previously 70 and is now unlimited as long as there is earned income · The previous age for beginning to take RMD from the account was 70 ½, it is now 72 That completes our overview of IRA accounts. If you are one of the 36 million IRA account holders in the United States I hope this helps explain the basics of the plan to you. If you have any additional questions you can request a copy of your plan’s SPD (summary plan description) from your employer which will have all of the rules for your specific plan. As always, if you have any questions regarding this topic or anything else with your personal finances please let us know at email@example.com. Look for the next blog post in the coming weeks on Roth accounts. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, 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. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
Financial Planning 101 - What you need to know about 401k plans
Probably the most popular type of investment account in the United States today is the 401k account. According to a 2019 document from the American Benefits Council there are 100 million 401k accounts in the United States holding over $6 trillion. That is almost one account for every two people over the age of 18. What exactly is a 401k account? It is an employer sponsored retirement account that allows you to contribute pre-tax dollars into an investment account. In many cases the employer will contribute funds into the account as well. The funds in the account will continue to grow tax deferred until the funds are withdrawn. At the time of withdrawl the funds are treated as taxable income. Most people are aware of these basic facts so let’s dig a little more into the details of the plan. Contributions As stated above, the employee makes pre-tax contributions into the account. The annual limit for contributions an employee can make in a year is $19,500. If you are age 50 or older you can make catch up contributions up to an additional $6,500 for a total of $26,000. In most 401k plans you can choose to make these contributions as either a percentage of your income or a flat dollar amount. What does pre-tax mean? Pre-tax contributions means that the income you direct into the 401k plan avoids income tax. For example, if you have a salary of $50,000 and you contribute 10%, or $5000, your state and federal income tax is based on the remaining $45,000 of salary. Income used for 401k contributions are still subject to Social Security and Medicare taxes though. Tax deferred growth Different types of investment accounts have different tax treatments. The 401k, as we’ve mentioned is funded with pre-tax income. The other key tax treatment is tax deferred growth. This means that during the time assets are accumulating in the account that individual assets within the account can be bought and sold and there is no tax on the gains realized for any of those transactions. There is no tax due at all until funds are withdrawn. Employer match While the whole tax deferral and pre-tax contribution things are great, the employer match is the truly powerful component of the 401k plan. Depending upon how the plan is structured the employer typically will contribute a certain percentage of your income to the plan depending upon how much you contribute. Typical plans will have rules such as the employer contributing .5% for every 1% you contribute up to 6% or a dollar for dollar match on the first 4% or something to that effect. That is a 50 or 100% immediate return on the amounts you are putting into the plan. That is the best return you will find and contributing at least to the point where you get the full match is considered one of the bigger no brainers in personal finance. Each plan may have slightly different matching rules so refer to your Summary Plan Description (SPD) to get the details on your plan. Vesting Vesting is the concept of obtaining rights to the funds within a 401k over time. Funds that you contribute from your paycheck into the plan are 100% vested immediately as that is your money. Matching funds contributed from the employer are a different story though. Many plans will have a defined schedule, for example 25% each year so that after four years you are fully vested. Again, look to your SPD for the specifics on your plan’s vesting information. Withdrawls Since the 401k is a retirement account there are rules around when and how you can take money out. Withdrawls can begin at age 59 ½ penalty free (there are a few exceptions where you can take penalty free withdrawls earlier). Remember the funds in these accounts have never been taxed so the entire amount you withdraw is considered taxable income for federal and state income tax purposes. And while most of us are aware about the penalty for early withdrawls there is also a provision on the backend dictating when you have to start taking money out of the 401k. Why? Again, the government has never received tax revenue from any of the money in this account and they want to begin getting their share. This concept is known as Required Minimum Distribution (RMD). At the age of 72 you have to begin taking withdrawls from the account based on an IRS life expectancy table. If you are over age 59 ½ you can begin withdrawing funds from a 401k plan penalty free from a previous employers plan. You will have to refer to your SPD about making withdrawls from your current employers plan if over age 59 ½. Investments A typical 401k plan has a limited number of investment options but most will include a fund choice from each of the following categories: domestic stock fund, international stock fund, bond fund, money market fund and target date options. This will allow you to build a basic diversified portfolio at a minimum. Many funds are now setup to automatically enroll people in the appropriate target date fund as a default option. Costs Many people don’t consider the costs involved in a 401k plan but they do exist. Each fund that you invest in within the 401k plan has what’s called an expense ratio. This is shown as a percentage and that percentage is charged based on the amount you have invested in that particular fund. These fees can range from 2% to almost zero. Be aware of funds with high fees. Anything over 1% can be deemed high given the amount of low cost funds that are available. The second cost is the one paid to the company who is managing the 401k plan on behalf of the employer. This should be a very low fee but can vary based on the size of the plan and the level of provider the employer can afford. Similar Plans The 401k is the most popular of these type of workplace plans but there are others that function in the same way. A 403b plan is very similar but is used by people in the education and medical fields. A 457b plan is similar and is used by state and local government employees as well as some medical professionals. Changes with SECURE Act Right before the end of 2019 Congress passed and the President signed into law the SECURE Act which contains some rule changes to how these plans are used. Here is a summary of the key updates: · The cap on the percent an employee can contribute thru automatic annual increases from 10 to 15% · Part time employees that have worked at least 1000 hours or 500 hours for at least three years are now eligible to participate in the plan. · The previous age for beginning to take RMD from the account was 70 ½, it is now 72 That completes our overview of 401k plans. If you are one of the 100 million 401k account holders in the United States I hope this helps explain the basics of the plan to you. If you have any additional questions you can request a copy of your plan’s SPD from your employer which will have all of the rules for your specific plan. As always, if you have any questions regarding your personal finances please let us know at firstname.lastname@example.org. Look for the next blog post in the coming weeks on IRA plans. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, 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. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
In my last installment I started getting into the details of investment vehicles with a focus on stocks. With this installment the focus shifts to bonds and the fixed income category. When constructing a portfolio it is best to have a mix of different asset classes including bonds so it is important to understand what value they provide to your overall investment mix. When an entity needs extra money they have a few options: they can sell stock, borrow money from a bank or sell debt to the public. Bonds are what corporations and governments use to sell debt to the public. Bonds are issued for a specific period of time with a stated interest rate paid to the purchaser. Bonds are usually sold in $1000 face amounts with interest paid semi-annually and then the face amount is repaid when the bond matures. There are three primary types of bonds. The most common are those issued by the U.S. government. These bonds are sold by the government primarily to fund budget deficits. As you see news stories about annual deficits or the mounting government debt this has been funded by the selling of bonds. The government then is responsible for paying the interest to the bondholders. U.S. government bonds are considered the safest investment available because they are backed by the full faith and credit of the government. In theory there is no risk of these bonds not being paid because the government can always print more money. These bonds are available in a variety of term lengths from 1 month to 30 years. The second type of bond is also issued by government entities but instead of the federal government these are issued by state and local governments and are better known as municipal bonds. These are often issued to fund items such as schools, infrastructure or other special projects. The final type of commonly issued bond are those issued by corporations. Companies may issue bonds because they want to raise money but don’t want to dilute equity. Pricing of a bond Bonds can be purchased on an individual basis or a mix of bonds may be purchased together within an ETF or mutual fund. Since mutual funds and ETFs hold a mix of bonds their pricing is completely different than individual bonds. As stated earlier, individual bonds have a face value of $1000 but are rarely sold at this price once issued. The reason for this is because interest rates change over time and that changes the value of the bond. Think about a bond selling for $1000 when it is issued and paying 6% interest. This would provide the bondholder with $60 interest per year. But if interest rates go down to 5% and new bonds are paying $50 per year to the bondholder a bond paying $60 per year becomes more valuable. A bond paying 6% at that point is worth $1200 as at that price a new bondholder would still be receiving a 5% interest payment. On the flip side if the interest rates go up to 7% and a new bondholder would be in line to receive $70 of interest per year from new bond why would they pay $1000 for a bond paying $60 per year? They wouldn’t and the 6% bond would then sell at a discount. To still get a 7% return on the $60 interest the 6% bond would have to sell for about $850. What this shows is that as interest rates go up the price for existing bonds goes down and as interest rates go down the price for existing bonds goes up. This is only a factor if a bond is sold on the secondary market. If you hold a bond until maturity the interest rate fluctuations are irrelevant and you would get your $1000 back. Prices for bond mutual funds or ETFs has nothing to do with the $1000 face value. Instead they package a group of different bonds and sell slices for something that is more reflective of an individual stock price or mutual fund. What determines the interest rate? Like with any investment the rate of return is going to be driven by the risk of that investment. If you hold a bond to maturity the primary risk is that the entity issuing the debt will not be able to repay the principal or make the ongoing interest payments. As stated previously the US Treasury bonds are considered a risk free investment so in turn they have lower interest rates. There are rating agencies like Fitch, Moody’s and Standard & Poor’s who assess the ability of the bond issuer to repay the debt. The higher rating the entity gets the less risk there is determined to be with their ability to make payments which leads to lower interest rates. Entities that are deemed more risky have to pay a higher interest rate to make the investment worthwhile since there is a greater likelihood of them defaulting. This is really no different than an individual having to pay higher interest rates on a loan because they have a lower credit score. Another risk with bonds is interest rate risk. This is the risk that as time goes by interest rates will change and you may be left with an investment that is paying less than current market rates. The longer the maturity of the bond the more risk there is of interest rate changes during the life of the bond and therefore they will tend to pay a higher interest rate. Why hold bonds in your portfolio As discussed in the previous installment, stocks are known for their volatility and historically produce high returns which comes with a higher amount of risk. Bonds historically are a much more conservative investment asset. The returns tend to be much lower but this comes with much less risk. That’s not to say bonds aren’t subject to loss. As noted earlier if interest rates go up sharply an individual bond may lose a lot of its value. But, if like most investors, you are purchasing a bond fund that risk tends to go way down. Over the last ten years the largest bond fund, Vanguard Total Bond Market Index (VBMFX), has lost money in just two of those years and the worst single year performance was -2.26% while the best year has so far been 2019 which has seen a 7.61% gain. Note that over ten years the entire range of returns is right about 10%. On the other hand, the largest stock fund, Vanguard 500 Index (VFIAX), has had its worst year of -4.43% and a best year of 32.33% for a total range of return of 36%. This has been during a historically strong stock market period. In 2008 the VFIAX was down 37% while our bond returned 5.05%. Having bonds in your portfolio provides diversification in your overall holdings. One way to achieve diversification is by having multiple asset classes in your portfolio. This helps smooth things out in your portfolio so if one asset class, say stocks, goes down sharply your entire portfolio isn’t at risk as illustrated in the paragraph above. In addition, bonds produce income. Earlier I mentioned that bonds pay interest twice per year. This interest income can be helpful especially in retirement as it is steady and reliable even if the price of the bond itself is fluctuating. Combining this interest income along with Social Security and dividends from stocks can help inflate your income and help you not have to draw down as much of your retirement assets. When you are younger, this interest can be reinvested to help purchase additional bonds and grow the overall portfolio. Downside of Bonds The main downside to bonds is the smaller rate of return when compared to stocks historically. That said, you shouldn’t be buying bonds with the thought they will give you the best return. Over the long run stocks will provide the best return but in a short term scenario bonds may do better if it is a volatile stock market. One other downside is related to the interest income I mentioned earlier. While it is nice to get the income from bonds, this income is taxed as regular income. Dividends from stocks on the other hand are usually taxed at the same rate as long term capital gains or 15% for most tax payers. Depending on what your income is level bond interest can end up being taxed at a much higher rate. While bonds are generally thought of as being a safer investment than stocks, that really depends on who is issuing the bond. As mentioned earlier, bonds from the US Government are considered risk free but depending on the financial health of a particular company or other government entity there can absolutely be risk that that entity may not be able to pay back the bonds or make the interest payments. Again, bonds are rated so something in the AAA or AA class is very safe. When getting down to the BBB rated bonds you should be aware of the increased risk. This risk should come with a greater interest payout buy but a greater chance the issue could default. How to purchase bonds Very few regular investors go out and purchase individual bonds. Instead most people buy bonds through a mutual fund or ETF. These larger holdings will put together a mix of bonds and you are just buying a small piece of whatever is in the fund. This gives you access to bonds from different issuers, bond durations and interest rates. Examples of the most popular bond funds are Vanguard Total Bond Market (VBMFX), Vanguard Total International Bond Fund (VTABX) and PIMCO Income Fund (PONAX). These and similar bond funds are available in your IRA, 401k plan or your brokerage account. Individual bonds are available via a brokerage such as Vanguard, Fidelity, Schwab or TD Ameritrade. What types of accounts should you use for holding bonds? So you want to go ahead and make bonds a part of your portfolio. Great. But where is the best place to hold them? Bonds can be placed in any of three main types of accounts, 401k/IRA, Roth and taxable brokerage account. That said, in my opinion, bonds make the most sense in a 401k plan or a Traditional IRA. This is because the interest income being generated while the account is growing before retirement isn’t taxed and instead is used to purchase additional bonds. A Roth account on the other hand has its assets grow tax free so it makes sense to put more aggressive assets in that type of account so you can take advantage of tax free growth. In a taxable account, it depends on the type of bond holding. Since interest income is taxed as regular income on bonds in this type of account that is makes holding bonds in a taxable account much less appealing. But, if you hold onto municipal bonds, which are tax free, then they can be a great fit and provide tax free income from a taxable account. Summary Bonds are a great way to add diversification to your portfolio and smooth out some of the risk you take on from the stock market. Just don’t expect the same type of returns you get from stocks and understand this may cause your portfolio to have an overall return of less than “the market” for a given period of time. That’s okay. Remember, you are not always trying to maximize every dollar of return. Instead, your focus should be on having your portfolio do what it needs to do for you and your individual situation. As with other parts of your portfolio look for diversification within your bond holdings by buying bond funds containing different maturities. If you have any questions about how bonds fit into your portfolio please contact a financial advisor. We would love to hear from you at 7th Street Financial. Until next time, I hope you enjoyed the read and learned a little something you can use in your own life. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, 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. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. #personalfinance #investments #financialplanning #bonds
Welcome to 7th Street Financials blog on personal finance. In my last installment on investment basics I gave an introduction on investing and now will begin to delve more deeply into individual topics related to investing. The intent of these blogs is to not only provide useful financial advice but also to educate people. The focus for the next several installments will be to cover the individual types of assets that people can invest in such as stocks, bonds, real estate and others. This installment will focus on stocks and what they are and what investing in stocks means. Stocks represent ownership shares of a company or equity. When a company is formed it issues a certain number of shares of stock. The owners of the shares own the company. Companies are either private or public. The vast majority of companies are private, meaning their shares are not available for the public to buy and sell. When a company goes public the shares of stock are made available for buying and selling on one of the stock exchanges I mentioned previously (NYSE and NASDAQ being the primary two). This allows the public to purchase shares of ownership in these companies meaning when you buy a share of Apple you own a very tiny fraction of the company. So why would someone want to buy stocks? Well, the simple reason is that stocks historically offer a very good return on your investment. Now, when I am referring to ‘stocks’ that means in terms of the market like I discussed last installment. Since 1926 the S&P 500 has averaged roughly a 10% annual return. This is a higher annual return than almost any other traditional asset class. 10% rate of return, sign me up! Based on this rate of return why wouldn’t we all just go out and buy stocks? If you recall the principles of investing I went over in the previous installment with this high rate of return comes a higher amount of risk and investing in stocks bring that risk. As you can see in this chart of annual returns for the S&P 500 since its inception the returns are far from a smooth annual 10%. Instead they range from almost a 50% return to a -50% loss which is indicative of the risks of stocks. In the 90+ years of the S&P 500 there has been a negative return in 29 of those years so positive returns outweigh the negative 2 to 1 and in 25 of those years the return has been at least 20%. Again, those are returns of a market or index and not individual stock. Individual stocks are far more risky than the market or an index might be. The ups and downs of individual stocks will be much greater than an overall market which gets smoothed out by the averaging of the ups and downs of the individual stocks. Take for instance just a few of these examples. Take the last 12 years of Chipotle which was a rapidly growing company and then ran into problems with food safety and has since rebounded. The calmest year of the stock was 2012 when it was down 12%. The following year was up 79%, then another 28%, food safety issues hit and the stock went down 30, 21 and 23% in successive years. It has since rebounded with gains of 49% and is up over 70% (going from 428 to 732) so far in 2019. Tesla has had 30 different 20 point moves in its stock price in just the past 12 months. In the past 12 months Facebook started at $196 per share, went to $215, dropped all the way to $127, recovered slightly to $145, dropped to $123, climbed all the way back to $197, dropped again to $164 and is now at $186. Stocks are initially made available through an Initial Public Offering (IPO). An IPO is the sexy glamorous star of the stock trading world. Some IPOs are wildly successful and others not so much. 2019 has seen Beyond Meats (ticker BYND) which was originally priced at $25 per share for its IPO in early May and has since exploded to $200 and is currently at $167 which is an amazing 568% return in just six weeks. On the flipside Lyft (ticker LYFT) which went public in early April at $88 is now at $64. An investment in an individual stock can be the ultimate swing for the fence move depending on the type of stock you buy. Market Capitalization Stocks can be classified in multiple ways. One of which is how big the company is, also known as market capitalization. Market Capitalization is calculated by taking the number of issued shares multiplied by the current share price. Large Cap companies are those with a market cap greater than $10 billion, mid-cap companies are valued between $2 -10 billion while small cap companies are less than $2 billion. The larger the company the less risky it tends to be. The reason for this is by the time a company reaches this stage it is thought it is less likely to experience big swings either for the good or bad. That doesn’t mean large cap stocks can’t have big moves in their stock price as evidenced by the examples above though. Mid-cap stocks are thought to be less risky than small cap stocks as well. Value vs Growth Another way stocks can be categorized is as value or growth. Value and growth companies can be found at all market cap levels. A growth stock is one that, well, is experiencing rapid growth in their sales and/or income. These companies tend to be newer or in a rapidly growing industry or technology area. Current examples include Amazon, Facebook and Google. Value stocks on the other hand tend to be more stable in their growth, older and in more established industries. Current examples include Johnson & Johnson, Exxon Mobil and Proctor & Gamble. These companies are less likely to see the big swings in their stock price but that stability may be very attractive to certain investors. Also, value stocks are more likely to pay a dividend back to their shareholders. A dividend is when the company sends back a portion of their profits. This can make the stock more attractive to potential buyers since the returns may not be as a high as those for growth stocks. Growth stocks are less likely to pay a dividend as they tend to reinvest all of their profits to grow the business. Valuing a stock How do you know if a stock is a good deal? The short answer is you really don’t. By its definition the price of a stock should reflect the future cash flows the investor can expect to receive in the form of dividends and/or rate of return on stock price. The truth is that it is much messier than that. Stock prices are really driven by the collective mindset of buyers on where they think the stock price is headed. What makes it messy is that people reach different conclusions about the same stock and arrive at those conclusions at different times so while one person may think the stock has peaked another may think it has a long way to go yet. That being said, there are multiple things that people look at to help them determine where they think a given stock price will go. One is to look at the fundamentals of the company. This involves looking at the company’s financial statements to see how healthy a company is. The overly simplistic logic is that a healthier company can support a higher stock price and if the future outlook is good then the stock price can reasonably be determined to increase as well. Factors that people will look for are sales growth, profit growth and keeping expenses and debt in line. If sales and profits are increasing that is a good sign and if people buy into that growth the price will go up. People may also look at the fundamentals of an industry or the entire economy as well. For instance even if a company’s financials look positive if that company’s industry is in a downturn the expectation may be made that eventually that company will suffer as well which may drive more people to sell the stock driving down the price as a result. There are a number of ratios people will look at as well. One of the most popular of these are Earning Per Share (EPS). This measures the stock price divided by the number of shares or, in other words, how much of the company’s profit is yours if you own the stock. Generally the higher the number the better the outlook for the company. Another very popular ratio is the Price/Earnings Ratio (PE) which measure the stock price divided by the EPS. In other words how much are you paying for a dollar of that shares profit. As a general rule the S&P trades at about a 16-17 PE ratio meaning you are paying $16 per dollar of profit associated with that share of stock. The conventional thought is when the PE ratio is higher than this level the stocks are priced too high given the profit they are generating which would be an indication prices are due to fall. Likewise, if the current PE is at 14 that might be an indication the stock prices are too cheap. But, individual companies will have wildly different PE ratios and doesn’t necessarily mean the price is too high or low as much of that is speculation around where the company can go. For instance, a relatively new company that is growing may have a very high PE ratio because people are buying into the growth and future expected profits even though current profits may be very small or possibly negative. A current example is Pinterest (ticker symbol PINS) which has a PE ratio of 1345 which is very high due to very small expected profits but reported sales growth of 57% over last year which is phenomenal growth. Time will tell if this company can continue to grow and with increased sales achieve the right amount of profitability to support a higher stock price. Publicly traded companies will issue guidance on where they think the company’s financial future is headed. Analysts who work for financial firms follow these companies and will also come up with their own predictions on sales and profitability numbers. These predictions become a target and each quarter when the company releases their financial results the actual results are compared to the targets and future guidance. If actual results outperform the targets and guidance says this should continue this indicates the company is performing better than anticipated and a bump in stock price may follow. The reverse happens when estimates miss target or guidance is lowered. Another method people will use to determine where a stock price is headed is to perform a technical analysis of the stock price and the trading of that stock. This method doesn’t really look at how the company is actually performing at all but instead looks at the historical trading of the stock to predict the future. For instance, as companies bounce around with their prices a trend may develop for a given stock that it tends to get to $100/share and then drops again creating a ceiling of support. If the stock were to ever crack the $100 barrier that would be a sign to buy as something has changed and the stock has established a new higher ceiling. These types of evaluations can be done to predict also when a stock price will head lower. Another factor in technical analysis is looking at the volume of stock traded in an up or down move of the price. For instance if the stock heads lower on light trading there might not be much to read into it but if it goes lower on heavy trading that might be an indication that something has truly changed with the outlook of the stock and could indicate a further dive in price. How to buy a stock So now whether you have done your research or not you have decided to buy shares of a given stock. How do you actually do it? You can work with a number of different professionals such as a stock broker, investment manager or financial planner or try it yourself. If you work with a professional it will require establishing a relationship with them and opening an account that they would oversee. These professionals will probably be the ones recommending the stock picks to you but they will execute the trade on your behalf. In exchange for doing this they will charge you a fee. A broker will likely charge a commission while an investment manager and financial planner will charge you a fee based on the relationship you have and not so much for any specific transaction they perform for you. Now, let’s say you want to go on your own. To do this you will need to open an account at a brokerage firm like Fidelity, Vanguard, Charles Schwab or TD Ameritrade which are the largest (in fair disclosure, I use TD Ameritrade as my custodian for investments). Each stock has its own symbol used for trading like the ones I mentioned previously in this article. When purchasing a stock you will be presented with several options like this example for purchasing Apple (ticker symbol AAPL): You will be asked to provide the number of shares you wish to purchase and an order type. A market order will process the order at whatever the current price, a limit order will allow you to enter a price and once the market price is at or below that price it will trigger the transaction. You will also have options for how long the order stays in place. This is only an issue for a limit order as it might take time for the order conditions to be met. You can select the order to expire at the end of the day or in after-hours trading as these platforms will let you buy and sell stocks 24 hours a day. You have probably seen the ads on tv for these forms touting their services and their low prices. When they refer to $4.95 to $6.95 that is the price they will charge you for executing the transaction on the stock. For example, if you purchase $1000 shares of a stock and the fee is $4.95, you will actually end up buying $995.05 of the stock with the rest having gone to pay the fee. The fee is the same regardless of the amount of the stock you buy or sell. I will quickly mention there can be multiple classes of stock issued by a company. By far the most common type is type A common shares which are the shares that are traded on open market most frequently and have voting rights. Companies may issue class B stock as well that have lesser voting rights. Companies may also issue preferred stock which may not have the price fluctuations but tends to get paid a dividend and will get paid out before the common shares. By buying a stock that you intend to hold in hopes the stock price will go up and/or receive income via dividends you are going ‘long’ on the stock. This is by far the most common way to get into stocks and will be the only method I cover here. You can also short a stock, buy or sell options, or trade on margin. These are all a little more in depth and not really for investing 101. Taxes Now that you own a stock how do you get taxed? There are two ways to get taxed when you own stocks. The first is when you sell stocks. When you sell a stock you will generate a capital gain or loss depending on if the stock is worth more or less than when you purchased it. If you sell the stock after owning it less than one year than it will be considered a short term gain or loss and is treated just like ordinary income and taxed just like your wages. If the stock has been held for more than one year than the gain or loss is considered long term. This is important because long term capital gains are taxed at lower rates, usually 15%, depending upon your income. If you sell multiple stocks during the year the gains and losses are netted against each other to determine if you have a gain or loss and whether it is short or long term or both. The second way to be taxed with stocks is through receiving dividends. Not all stocks pay dividends but if you own one that does and you have held the stock for more than 60 days before the dividend was declared it will be considered a qualified dividend which will be taxed much like long term capital gains, usually 15%, depending on income. Unqualified dividends will be treated as ordinary income and taxed like your wages. Conclusion Stocks are risky but have a high historical rate of return. When investing long term it is hard to generate the returns needed without a portion of your portfolio dedicated to stocks. Stocks help provide a hedge against inflation due to the higher return. Investing in the market is one thing but picking individual stocks can be especially risky. This should provide a solid introduction to stocks for you which will carry through on future installments. The next installment will cover bonds. As always, if you have any questions about this topic or any other personal finance issues reach out to 7th Street Financial at or visit the website at www.7thstfinancial.com. Disclosure – Jeff Burke personally owns shares of Facebook, Apple and Pinterest in his own portfolio. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, 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. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. #investing #stocks #personalfinance #financialplanning
In this latest installment of my Financial Planning 101 series I am moving onto the topic of investing. The last installment found here wrapped up my coverage of insurance and it is time to move into a new area. I am guessing more people will find this more interesting but I started with those other topics for a reason as I believe the previous topics dealt with the issues that form the foundation for solid personal finances. Covering investing will take some time so there will be a number of individual postings on this larger topic. This post will act as an introduction to investing. Later posts will get into more specific topics. Let’s establish some basic terminology that will come in handy to understand this and future installments. Stock Market: People will generally refer to the “Stock Market” but what does that really mean? The definition of stock market doesn’t really match up with what most people mean when they mention the ‘market’. The stock market is an established exchange where stocks of individual companies are listed for buying and selling. We have two primary stock markets in this country, the New York Stock Exchange (NYSE) and NASDAQ. NYSE is considered the leading stock exchange in the world with 2,800 companies listed and over 1.4 billion shares traded daily on average. NASDAQ tends to have more tech centered focus with 3,300 companies and 1.8 billion shares traded per day. Stock Index: A stock index is a group of stocks that have their collective performance measured. These stock indexes are what most people are actually referring to when they talk about the stock market. There are dozens of indexes used between the stock markets in the U.S. but there are three primary ones we follow. Dow Jones – This is the granddaddy of all indexes and the one that gets the most coverage on the news. We are all familiar with hearing The Dow was up or down in a given day. The Dow Jones is actually comprised of just 30 stocks that are selected to represent a cross section of the America economy. The Dow is a price weighted index meaning that a company like McDonalds which is trading at $200 per share has four times the impact on the Dow that Coca-Cola has which is trading at $51 per share. Because of this companies with high share prices such as Google and Amazon while amongst the largest companies in America are not part of the Dow. S&P 500 – This is a collection of 500 of the largest US companies. This index is maybe the best barometer for the overall market given the breadth of companies and industries represented. This index is market cap weighted meaning that a company like Apple which is worth near $1 Trillion will have 200 times the impact on the index than Nordstrom which has a market cap of just over $5 Billion. As a result this index largely influenced by Microsoft, Apple, Amazon, Facebook, JP Morgan Chase and Google. NASDAQ – This index spans the entire 3300 companies listed on the NASDAQ market. This is also a market cap weighted index and since this is a tech heavy index it is most influenced by Microsoft, Apple, Amazon, Google, Facebook, Intel, Cisco, and Netflix. Portfolio: This is the collection of your investments. This includes everything in all of your investment accounts, including retirement accounts and other types of investment accounts. Now that we have established some of the basic terminology let’s go over some of the basic principles of investing: Risk vs. Reward This is the name of the game when it comes to investing. The more risk you are willing to take on with investing the greater the returns you should expect over the long run. Stocks are considered a more risky investment but over the long run has averaged a 10% return (S&P 500 average return from 1926 to 2018) compared to bonds which had an average return of 5.4% over the same timeframe. The risk of course is in the short run. The stock market is more vulnerable to a sharp downturn than bonds which are viewed as more stable. And we don’t really know when that downturn might happen. TV is full of talking heads who may claim they do and there is some statistical evidence that is available that might be a gauge on what could happen but it does not always play out that way. We recently have come through one of the more volatile times in market history. In 2008 the S&P 500 was down 38.5% and is up roughly 400% in the years since. So while overall the returns since the beginning of 2008 have averaged 6.5% there were very nervous times for many investors for a period of time. 2. Invest early, invest often. We have all seen the charts that show the impact of investing over a number of years. I will include one here as well just to hammer home this point. The most powerful tool you have as an investor is compounding interest. The longer your money stays invested and can continue to grow the better. This chart illustrates that point. The person who began investing at age 25 has a slow build of their nest egg. But once they hit roughly age 50 the portfolio begins to grow much more quickly. Let’s assume an 8% rate of return. Once they have accumulated $400,000 the 8% return starts to really add up. That alone is worth 32,000 plus the 5000 they invested. That brings the total to 437,000. Another 8% return on top of that is 35,000 plus the 5000 that was invested is 40000 of growth for new balance of 477,000 and the growth continues to accelerate from there. On the flipside, the person who didn’t begin investing until age 35 never really gets a chance for those big gains because by the time they would start to happen they are at retirement age and now need that money for expenses. So the lesson is for those of you who are young and feeling like money is tight and you feel like you need to wait until you are making more money please try to find a way to start saving right away. There will always be some expense that comes up that will make it seem like it isn’t the time to start investing so do it now and just get used to that money not being there. You will thank yourself in the future. 3. Market timing is extremely difficult. We all know the goal of buying high and selling low. The problem many investors run into is that they get hung up on selling at the absolute peak price or trying to buy at the lowest price possible. These exact price points are impossible to know. You will be much better off in the long run if you decide it is time to buy or sell and just moving forward with it. Again, none of us knows if from one day to the next the market will be up 300 or down 150. And, in the case of mutual funds, the price isn’t determined until the end of the day anyway. Here is another chart showing the potential impact of getting too cute with the market and waiting to buy. This shows the impact on your performance of you missed out on the top five days over the past 20 years. As you can see it would make almost a 35% difference in the overall return on your investment. Bottom line: if you are comfortable with the return you have made go ahead and sell. If you feel that an investment is a good value at the current price, go ahead and buy it and don’t worry about the couple of bucks wither way that could have been made. The other piece of advice that goes along with this is to simply stay invested. Many people get nervous when the market gets volatile and want to sit on the sidelines until things get better. The problem is by the time they feel better about the market the gains might have already been largely realized and they are buying back in at the top of the market. I recently spoke to someone who mentioned they pulled everything out in 2009 after the financial crisis and still hadn’t reinvested yet. They mentioned they avoided losing everything. I didn’t have the heart to tell this person they also missed out on the roughly 400% appreciation that has taken place since then. 4. Most gains are a result of a diversified portfolio. I’ll speak to diversification more in depth in a later installment but basically diversification is the principal of spreading your investments around between a variety of asset classes and individual assets. This is a key tool in the risk management of your investments. At the same time it is beneficial to your overall returns. The ‘market’ has many segmentations to it and at any given time some of these segments will be performing better than others. By being diversified you are protected against the risk of being too heavily invested in the poorly performing segment or individual asset and you will also be invested in whatever segment is performing well at the time. Admittedly, this is the glass half full take on this because at the same time one can use the rebuttal that you’re missing out on returns by not being in the hot segment. While this may be true, the fact is it is hard to know what the hot sector is until after it has made its run. A down sector might have a couple of good weeks quietly when most people aren't watching. Many might think of tech as the hot segment and while overall for the last few years that has been the case there have been windows of time where others have been better performers. As of June 4, 2019 the top sector of the year has been Utilities which has been up 17.4% over the past year while Tech is up just 2.35%. Over the past three months Real Estate is the leading sector up 4.82% compared to 2.23% for Tech. Over the past month Utilities have been the leader up .49% while Tech is down 7.71%. As you can see over the past month Utilities have outperformed Tech by over 8%. Now, I would challenge you to find a person who 30 days ago was so smart that they moved their investment portfolio out of Tech and went all in on Utilities. Anyone want to raise their hand who did that? Anyone, anyone? No, I didn’t think so. The reason for this was a couple of bad days killed Tech, and Utilities, which are less volatile, basically treaded water. By being diversified though you would have had a portion of your investments in Utilities which would have helped offset the beating Tech took. 5. Rebalance your portfolio periodically. When you put together your diversified portfolio you will most likely have a target percentage for each of those assets in your overall portfolio. You will also find that individual assets will grow at different rates and this leads to individual holdings ending up in different percentages from your target. For instance, say you have Mutual Funds A and B and want each to be 20% of your portfolio. Over a period of time fund A performs well and now makes up 23% of your portfolio while fund B didn’t do as well and now sits at 18% of your portfolio. In this case rebalancing would call for selling a portion of fund A to get back to 20% and then buy more of fund B to get that back to 20% as well. Most guidelines will call for you to do this exercise once or twice per year. This practice will also reinforce the concept of dollar cost averaging which will be discussed more later as well as locking in the practice of selling high and buying low. 6. Expenses can erode your returns. I will devote more time to this issue in a future post but for the purpose of this installment I want to point out that expenses can be a real drag on your returns. Individual investments may have a load fee or management expense fee associated with them, There might be a fee tied to your investment account and finally, if you have an advisor they might be charging you a fee based on your investments. These fees can really add up over time. That concludes this primer on investing. Hopefully you found something interesting or valuable here. The next installment will focus on stocks and their characteristics. As always, if you have questions about your own personal finances I would be happy to talk to you, Send an email to or schedule a 30 minute meeting here. #personalfinances #money #financialplanning #investments #investing
I apologize for the long delay between installments but sometimes life gets in the way and I have been distracted with a few things recently, namely trying to train a new puppy that we picked up in April. That said, I am back with the final installment related to Insurance, this time dealing with Disability Insurance. Maybe not the sexiest topic in the world but one that is critically important to protect your family. In the event of a long term injury or illness (think cancer, auto-immune, stroke, cardio vascular issues or injuries from a severe accident) which leave you unable to work for an extended period of time how does your family plan to continue to have money to pay bills? Even in families with two working spouses most families rely on both of those incomes to make ends meet. This is where Disability Insurance comes into play. Some quick facts about disability insurance. Workers in their 20’s have a one in four chance of experiencing a disability at some point so this is not as rare an occurrence as you might think. While you may think you have a safe job and don’t need the coverage from an injury, 90% of claims are for illness and not injury. Do you think men in labor jobs are most at risk? 60% of disability recipients are women. 41% of recipients are under age 50 and 33% are under age 40 so it is not just older workers at risk. Finally, 51 million Americans do not have this type of coverage. The goal of Disability Insurance is similar to life insurance in that its intention is to replace lost income. In the case of Disability Insurance though your income is replaced in the event of an injury or illness and not death. This article will cover the primary components of a policy, the amounts of coverage, and the tax consequences of policies. Many employers will offer a short term disability policy that will continue to pay your salary in the event of illness or injury for a period of three to six months. Long term disability (LTD) can end up providing benefits for decades. This type of policy is often provided by employers as well but might come at a cost. Long term disability will be the focus of this post. Some people may believe that Social Security will be their safety net if becoming disabled. About 70% of initial claims are rejected. Claiming these benefits can be a complicated and lengthy process. You must be deemed unable to perform any substantial and gainful work activity for a period of at least one year and even then it may take months or even several years before you start receiving benefits. The current maximum monthly benefit is $2,861 while the average benefit is $1,234. The benefit is based upon your income and not the severity of the injury or illness. Components of Disability Policy Elimination Period – This is the amount of time that has to pass before the policy has to begin paying benefits. Common time periods are 30 to 120 days but there are many options available. The longer the elimination period the lower the premium you pay. The elimination period you choose should align with how much you have in emergency savings. Occupation class – This refers to the profession of the worker being insured. Each type of profession is assigned a class and the more likely a profession is to result in physical injury to the worker the higher the rates you’ll pay. There are five numbered classes and the lower the class number the riskier the profession. For example, lawyers and accountants are in classes 5 and 4, office workers would be in class 3, while manual labor jobs would be in class 1. Definition of disability - This refers to the level of your disability needed before the policy benefits will be paid. The defined levels refer to the level of employment you are still capable of having as a result of the injury/illness. Any occupation – This would mean that no benefits are paid as long as the worker is still able to hold any gainful employment potentially including unskilled low paying work. This would require pretty much total disability to get benefits. Own occupation – With this policy definition benefits are paid if the policy holder is unable to do their current job duties. This can be especially important in higher paying jobs or a job that requires a specific skill. For instance, if a surgeon is in an accident and loses use of his hands but can still do plenty of other professions the surgeon would still receive benefits. Tied to education, training and experience – This would mean benefits are only paid if the policy holder can no longer work in a field commensurate with their education, training and experience. Going back to our surgeon example, if the surgeon could no longer perform surgery but was capable of teaching med school they would not be eligible for benefits. This is a major driver on the cost of the policy as a policy with ‘any occupation” is going to cost far less than an “own occupation” policy. Also, you want to make sure you get the coverage you need especially if you are in a higher paying profession where it is vital for you to protect your income. 4. Benefit Amount – This is the amount you will receive if you have a qualifying claim. This is tied to your income level and obviously the higher the benefit amount the higher the premium. If you seek a policy outside of your employer then you will have to provide some sort of proof of income. Typically an employer plan may pay out at about 60% of your current salary. This is important to note depending upon how you are compensated. These policies will not cover compensation received from bonuses, overtime, deferred comp, stock options or other non-salary compensation. Benefits received are usually reduced by other sources of disability income such as workers comp or Social Security. If you have both a personal policy and an employer provided policy the personal policy benefit will be reduced by the amount of the employer policy benefit. Young workers in certain high paying careers (engineering, lawyer, medical fields for example) may also be able to get increased benefits based on projected earnings. This is an option that might be available to workers in their first couple of years in the field. There is a cap on the benefits they can receive but it is a higher benefit amount than if based on their current salary. 5. Benefit Length – This is the period of time you will continue to receive benefits from your policy. Generally policies will pay to your age 65 with the thought being that would be retirement age so there is no need to pay beyond that. There may be an option to receive benefits for a stated period of time such as 5 or 10 years. This might result in a lower premium but you could be at risk of losing benefits for a number of years if you select that option. 6. Policy Riders – These are options available to the policy holder that can be upgrades to the policy, of course for an additional fee. Examples include:Future Purchase – allows you to purchase additional coverage without undergoing a new medical evaluationInflation protection – Provides a benefit amount that increases each year by a couple percent to keep up with the cost of living.Waiver of premium – This allows the policy holder to no longer owe the premium while receiving the benefit. How disability benefits are taxed This comes down to who is paying the premium. In the event of a typical employer provided policy replacing 60% of your income, any benefits received will be taxable income for the recipient since the employer is paying the premium. Note that this reduces your real benefit to well below 50% depending on your tax bracket. Many employers might also offer the option to purchase additional LTD coverage and the benefits related to that portion of the policy will be tax free since the employee is paying the premium. Likewise, if you don’t have an employer provided policy and have an individual policy from an outside provider all of the benefits would be tax free since you are paying the entire premium. Because the benefits from an employer plan are taxable it is important to get the additional coverage or you could be in for a disappointment when the benefits arrive. Difference between group and individual policies If you are covered through your employer for LTD this is known as a group policy. Group policies tend to have much lower rates because the risk for the insurance provider is spread over a large group of people. As stated earlier these types of policies generally replace 50-60% of your income and the benefits are taxable to the recipient. Individuals may have the option to purchase additional coverage usually up to a maximum of 66% of salary. This additional coverage is still considered a group policy even though purchased by the individual so the rates will be fairly low. The benefits received from this additional coverage will be tax free. One thing to note is that your coverage with these policies ends when you leave your job. Individual policies can be purchased from a variety of insurance providers. These policies tend to be more expensive but do have a few nice features. Generally these policies seek to replace 50-70% of salary. First, they are guaranteed renewable meaning the policy stays in force as long as you pay the premiums. Next, the policy premium generally does not increase during the life of the policy whereas coverage through an employer can have a different rate each year. Lastly, as stated before, the benefits are tax free for the recipient. I hope that sheds a little light on the topic of disability insurance for you. This is the last post related to insurance I will be doing and will now be moving on to investments. As always, if you have any questions or concerns about your personal finances related to this or any other topic please reach out to me for a free consultation at or click here to schedule a no cost discussion. #personalfinances #financialplanning #insurance #Disability
So far in the Financial Planning 101 series I have discussed multiple types of insurance coverages you can get to cover your things and your family. In this installment I will cover a type of insurance coverage that you may have heard about and hopefully you have but in many cases people either don’t have it or certainly don’t have enough and that is personal liability coverage or an umbrella policy as it is commonly referred to. Liability insurance provides coverage for you when you are deemed at fault in some sort of accident or incident they come after you for damages or file a lawsuit. This can be the result of a car accident, someone getting injured at your house or by your pet, or as the result of some other act of a member of your family. The damages people could seek might be for medical expenses but could also be more comprehensive depending on the situation and depending on the severity of the injury or worse, in the case of death. As discussed in earlier installments on home and auto insurance there is an element of liability coverage included in both of those types of policies. That said these policies usually include a limited amount of liability coverage. This amount is generally sufficient to cover standard medical bills and property damage but in the case of something more severe would most likely come up short. For instance, an automobile policy might typically contain $300,000 in liability coverage. If there is a worst case situation where someone ends up disabled, with long term medical care needs or death as a result of an accident the $300,000 won’t cut it. Any damages you are found responsible for beyond the $300,000 in coverage would then come out of your personal estate. This could mean they can come after your life savings to make good on the damages. This is where the Umbrella policy comes into play. An Umbrella policy is meant to provide protection for you against liability damages and provide much greater amounts of coverage than found in typical home and auto policies. Umbrella policies are typically sold in increments of $1 million. The best part is these policies provide the most coverage for the dollar of any common insurance product. Assuming you aren’t in a high risk situation you may be able to get $1,000,000 in coverage for under $200 per year. That’s right, per year, not per month. Many Umbrella policies won’t kick in unless you have a stated amount of liability coverage in your auto or home policies so you will need to make sure you have the proper amount of coverage A good idea is to determine what your net worth is by using readily available online tools from places like Nerd Wallet, Kiplinger’s or on our site at 7th Street Financial. The safest thing to do is to get enough coverage to cover your net worth. Your net worth will change over time so make sure you stay on top of this and periodically update your coverage amounts if needed. Let’s be honest, insurance products aren’t sexy but they serve a critical role in your overall financial picture. Hopefully you never need to actually use the insurance products you have because that generally means something bad has happened but insurance is there is to save the day when things are at their worst. My firm doesn’t even sell insurance products but as a Financial Advisor it’s my job to talk to clients about protecting what they have and I would advise almost any client to pick up this type of policy due to its ability to protect your estate at such a reasonable price. Hopefully this was informative and gives you something to think with your own personal situation. If you would like to talk about this topic or any other aspect of your personal finances click this link to schedule a free discussion with me. #personalfinances #financialplanning #insurance #umbrella #liability
Welcome to the latest installment of the Financial Planning 101 series. This post will continue to cover insurance based topics with a focus on auto insurance this time. I’ll cover the different sections of an auto policy and try to shed light on what the various sections cover. The goal will be for you to better understand the type of coverage you have so you can be better informed to make sure you are adequately covered but also be aware of opportunities to save a few dollars on your premiums. Car accidents are the most common type of injury and property cases that end up in court. Statistics show that there is a car accident every ten seconds on average in the United States. As a result most states require by law that certain coverages (mainly liability) are in place for a driver. Outside of health insurance this is by far the insurance most likely to actually get used for an individual and why it is important to understand what coverage you actually have. Your auto insurance policy may also be known as PAP (Personal Auto Policy) and will have a declarations page which will be the summary for the coverage in the policy. Here you will information on the car itself, the insured driver and the coverage limits. The policy will cover the stated vehicle in the policy as long as it is owned by the named individual or their spouse. In addition, if a child in the house owns a car that will require a separate policy. Part A – Liability coverage This section provides coverage for the car owner and/or driver that causes an accident that results in injuries and/or property damage to someone else. This is the most important type of coverage and the one usually required by law. So basically if you hit someone or cause an accident this is the coverage that will pay for the other person. This is also the portion of the policy that requires the most coverage. Injuries from an accident can be substantial and the damages can run well over $100,000 in certain cases. The coverage you have on your policy will typically be shown as a series of three numbers that look something like this; 100,000/300,000/100,000. The first number represents the amount of bodily injury damage covered for a given injured individual in the accident. In this case if a person is entitled to $40,000 in claims they will be covered in full but if there is $150,000 in claims the policy will pay $100,000 and the policy holder is responsible for the remaining amount. The second is the total amount of bodily injured covered by the policy. This comes into play if you are involved an accident and say there are four people in that car that all get hurt. While each individual may be entitled to receive up to $100,000 in claims the policy will only pay a maximum total of $300,000. In this example let’s say that the three people sustain injuries in the amounts of $150,000; $60,000; $50,000 for a total $260,000. In this case the insurance will pay the full amount for the $50,000 and $60,000 claims but only $100,000 of the $150,000 even though the total amount of claims is less than $300,000. Finally, the third number is the amount that the policy will pay out towards property damage. One important note with this coverage is that while the policy may be for a given vehicle and driver this coverage attaches to both even if the driver drives a different vehicle or someone else is driving the covered vehicle. This means that you are covered if a friend or family member borrows the car or if you drive your spouse’s car for the day. Rental cars are included in this as well. This portion of your policy should be coordinated with any umbrella policy you might own. Umbrella policies will be discussed in the next blog entry. Part B – Medical Payments coverage This section is pretty straightforward. It provides protection for medical expenses incurred by the driver and passengers incurred while in an accident in a covered vehicle. The amount of coverage is typically in the $1,000 - $10,000 range per individual as this coverage would be coordinated with medical coverage for the insured. There are usually no deductibles with this coverage. Part C – Uninsured Motorist Coverage This optional coverage comes into play when you are involved in an accident with another driver who is at fault and does not have coverage. This essentially replaces the liability coverage from the other driver and pays the policyholder. The coverage amounts are usually the same as those in Part A but there is an option to have them different. The lower the amounts the lower the policy premium. There is also an option for Underinsured Motorist Coverage which is very similar but is for when the driver causing the accident has liability but not enough to cover the damages. Say for instance you are an accident caused by a driver who is carrying a minimal amount of liability like $10,000 per individual and $20,000 in total liability. An accident that results in $50,000 is more than that drivers liability covers so their policy will kick in the $20,000 and the Underinsured Motorist portion of your policy would be there to kick in the remaining $30,000. Part D – Coverage for damage to your auto There are two parts of this coverage. One is for damage as a result of an accident, known commonly as collision, and the other is for damage from non-accidents, more commonly known as comprehensive. These again are optional coverages and are not required for the policyholder. Damages from these claims are based on an actual cash value basis up to the extent of the value of the vehicle. If you are an in accident while driving a brand new BMW and the vehicle sustains $8,000 of damage the policy will pay that amount less the deductible. If on the other hand you are driving a 1983 Nissan Stanza, like my first car, valued at say $500, the policy will only pay out the maximum of $500 less the policy deductible. In the case of a vehicle with low value the policyholder may want to think if this coverage is worth it. Also, having a higher deductible is a good way to save a few bucks on your premium if you can afford paying the deductible out of pocket on the rare case you need to make a claim. Policy Endorsements – Potential add-ons for your policy. Much like was discussed earlier with homeowners policies you have the ability to add optional items to your policy. Some common examples of this are: * Coverage for drivers who don’t own vehicles but drive regularly. This is perfect for a child once they have a license but not their own car. * Other vehicles can be added such as motor homes, motorcycles, snowmobiles, etc.. * Special coverage for antique or restored vehicles in the case of a stated limit in Part D that may be insufficient. Finally, here are a few notes on how policy premiums are determined and how you can save. Age, gender, vehicle and driving history are the biggest factors in determining your premium. We all know young drivers can be very expensive to insure as they tend to be less safe drivers. That said savings can be had if a student has good grades, has taken defensive driving classes or is away at school without a vehicle. Discounts are available on automobiles depending on safety features, anti-theft devices, air bags, running lights and certain geographical locations. Also, many insurers will give a break if you have multiple types of coverage with them. If you have questions about your coverage please talk to your insurance agent or a fee-only financial advisor to review what you have and get guidance for what coverage you actually need. Thanks for reading and hopefully you learned something that can help with your own situation. The next blog will focus on personal umbrella policies. #insurance #money #financialplanning #personalfinances
The new year is underway, the kids are back in school and my beloved Alabama Crimson Tide's football season has come to a very disappointing finish. With that it is time to fully focus now on the things we can do to improve in 2019. As a financial planner I will focus just on financially related items. I need to lose 10 pounds like most people, ok, closer to 20, but unfortunately I don't have expert advice on how to do that so will stick to what I know. Below is a list of 8 things you can tackle this year to put your personal finances on more solid footing. Does it feel overwhelming to try and tackle all items on this list in one year? Don't stress about it. It is unrealistic to do all of these at once. Most of just don't have that much money to dedicate to all of these goals at once. Start at the top of the list and work your way down if you can. Items 2, 4, 5 and 6 can all be done without requiring extra money so if nothing else give these a try. 1. Assess your emergency savings – You should have a goal of 3 to 6 months of living expenses. If you are short of this target see if you can set aside a little more to help be ready for unexpected emergencies. You might find saving the amount to hit the 3-6 month goal could be overwhelming. That’s ok, just make a conscious effort to address the goal and increase your savings to the point you can. Realistically it may take several years to hit this goal. 2. Evaluate your insurance coverages – Review your coverages on your home, life, auto, disability and liability/umbrella policies. If you don’t have one of these policies consider getting them to add the protection you need. Review your coverage amounts to make sure they are adequate for the amount of protection you may need. Likewise look to see if you are paying for coverage you don’t need or can increase your deductible to reduce your premiums. 3. Review your debt situation – How much debt are you carrying on high interest rate credit cards? Paying down debt in some situations can be even more beneficial than investing. If your credit card debt has gotten too high come up with a payment plan that makes sense to start reducing this. Your money should be used for doing better things than paying interest. 4. Review your budget – Are you feeling a pinch with your monthly expenses? Give those expenses a review and see if there are places you can easily trim a few bucks. Many people overlook these small savings but a handful of them can suddenly add up to $100 per month or more pretty quickly. This could be looking for a less expensive phone, tv or internet plan for example. It could also be canceling unused services like a gym membership or various streaming, book or music services. 5. Review your tax withholding – With the tax cut of 2018 most people found themselves in a lower tax bracket and therefore had less taxes withheld. The downside is many deductions were also limited or removed and some people may find themselves still owing a similar amount in taxes as they did before. This could result in some people actually owing federal taxes when they file their returns this year. 6. Adjust your portfolio – The start of a new year is a great time to review your investments and see if your portfolio is still in alignment from a risk, allocation and quality standpoint. 7. Increase your retirement plan contributions – Your goal should be to set aside 15% of your income for long term financial goals. If you are short of that target and think it will be too big of a stretch to get there all at once start with increasing your contributions by 1% 8. Consider additional investing – If you want to invest outside of an employer retirement plan or maybe don’t have that option look to contribute to an IRA, a Roth IRA or a taxable account. The right option for you will depend on your circumstances and goals. If you decide you want to address any of these and aren't sure how or would like help, contact me at for a risk free discussion to get you on the right track. Best of luck to everyone and have a great 2019! #money #financialplanning #personalfinances