There is a difference between saving and investing. Saving is for funds that need to stay liquid and you may potentially use in 18-24 months. The funds should be kept in a checking account, savings account, or money market account.
Investing is for your long term future, to make sure you can retire with no worries throughout the remainder of your life.
Stay true to the basics: The beauty of age-old wisdom of investing is that it is timeless. Regardless of which year and which month you are in, the principles of investing remain the same.
So, investors are recommended to have a long-term vision of the markets and stay invested in the equity for a long term i.e., a minimum of five years to see good results.
When I talk with people about savings it is generally in the vain of long-term savings through accounts such as a 401(k) or some type of IRA. We don’t talk enough about the short terms items, these are the need or want items that without savings for them, can throw all of your savings goal into turmoil.
Let’s look at a few examples of what I mean:
A family vacation
Your emergency fund
A down payment for a car
Upgrading your TV or phone
A planned medical procedure
While looking at this list, your emergency fund should be the first bucket to fill. A medical procedure or down payment for a car might be in the need category, while a vacation or upgrading electronics are in the want category.
Take a hard look at your short term goals and funds for them.
Review your health benefits. Many companies have open enrollment during September, this is a good time to review your health benefits to see if you want to make any changes.
Increase your Retirement savings. Now is a good to increase what you have been contributing to your 401k plan. Remember; every dollar you increase your contribution by, is a dollar less going to the IRS. If you are self-employed and want to open a Simple IRA, your deadline is October 1st.
Review your credit cards. Now is the time to see if there might be benefits that will expire. Also, if you are planning a trip for the holidays, now is the time to pay off your credit card so you can pay for that trip. Remember, do not charge any more than you can pay when your bill arrives.
Do you need to replace a home appliance? September is when all of these items go on sale.
Take some time while you are drinking your pumpkin spiced drink to review your financial life and finish the year out right.
COLA (cost of living adjustment) for Social Security has been around 1%-3% increase over many years with the exception of the last three. Because the Federal Feds Rate has gone up so much over the past three years, we all know the cost of everything has increased. COLA over the past three years has ranged from 5.9% to 8.7%, those are huge increases. Not only are current Social Security recipients getting that increase, it has also been added to the record of all of us who are still paying into the system. This gravy train is about to end.
COLA will be going back to the average of 3%, here is what the increase will look like:
3% COLA in 2024 means the average retired worker would receive an extra $55.12 in monthly benefits, while spouses would get an additional $26.79, survivors would get $43.56 more, and disabled workers would get an additional $44.59 per month.
When preparing for retirement, then once you are retired, good cash reserves and avoiding taxes are two big topics. I cannot tell you how much cash to keep in reserves, it is a personal choice. Some clients are comfortable with $15,000, some are comfortable with $200,000. I find my retired clients sleep better at night when they have cash on the sidelines. When the stock and bond markets crater, like they did in 2022, cash on hand is a welcome relief. Generally speaking, cash can be checking, savings, or money market accounts.
Taxes are a whole other factor in retirement. Some people think that they will not have to pay income taxes in retirement, then get an unpleasant surprise. Taxes in retirement are an important consideration and can eat away at a retiree’s budget. Withdrawals from a 401(k) are taxed as ordinary income. Social Security may be taxable. Dividends and interest may be taxable. Not to mention there may be property taxes, sales taxes and other taxes that may be invented down the road. It’s a taxing problem.
Take the time to review both of these topics prior to retirement, you will enjoy your retirement more if these worries are off the table.
I have been hearing from people at all different income levels that they are stressed about how much everything cost today. Inflation is real, we see it at the grocery store, that gas station, and if you think about a night out – you really see it. Here is one small thing I would challenge you to do that can make a big difference:
Resolve to cut out one expense that brings you neither joy nor prosperity.
Write your resolution on a piece of paper and post it prominently, so you won’t forget. Put the money that you would have spent into an envelope or a separate account, for savings.
Do this for at least 3 months then take a stress and savings assessment, you should feel mentally and fiscally better.
I am referring to the student loan repayments that seem like they have been deferred so many times I can’t count anymore. Eventually, you have to pay the piper. Here is some new information that may be helpful. I say may be – because we do not know if this will change again.
The Biden administration launched a beta application for its new income-driven repayment plan called Saving on a Valuable Education, or SAVE, plan. This plan started at the beginning of this month.
The plan may cut many borrowers’ previous monthly payments in half and leave some people with no monthly bill. Currently, SAVE increases the income exemption from 150% to 225% of the poverty line. It also eliminates unpaid monthly interest charges if you make your monthly payment on the principal, and it ends the need for your spouse to co-sign your application. Additional benefits start in July 2024.
If you don’t plan to make a payment in September, your servicer may apply an administrative forbearance on your loan, so no payment is due. If you want to opt out of this forbearance and pay in September, you must notify your servicer by this date.
Interest begins to accrue again on your loan. If you choose not to pay in September, you will be charged interest for this month.
Your first payment is due.
I suggest you take the time to review your student loans and set up your payments.
In the last two months I have had 6 client pass away. Many of them had lived very long lives, a couple did not. It is never easy to deal with a death, there are so many emotions, life plan, events that will all be different now. I try to make my part of this horrible life-cycle event seamless. I try to make sure all accounts that I manage, and outside of my management, are titled properly so they will transfer easily. Believe me, the last thing anyone wants to deal with is messy financial paperwork while trying to process your loss. One thing that our firm has available to help with this transition is our Financial Organizer. I recommend reviewing these topics when your family is together and everyone is healthy, it takes a lot of the stress out of the situation. If you would like a copy of this Financial Organizer please email me at firstname.lastname@example.org.
I have been asked this question a lot lately as I help my clients plan for their retirement. Here are a few questions I ask to determine if you should pay off your mortgage before retiring.
Do you still get a tax deduction for the interest you are paying?
If you can still deduct interest, I think that is a good thing. Any deductions that help reduce your Federal Income Tax works in your favor.
What is your interest rate?
If you have a mortgage with a 3 or 4% rate, in my book that is a cheap loan, why rush to pay it off when you can potentially earn more through investments.
Will paying off your mortgage cut into your emergency fund?
Having good cash reserves, especially in retirement, are important. If paying off your mortgage will leave you cash poor, rethink that decision.
One tip to pay down your mortgage faster is to make bi-monthly payments. You can potentially cut ten years off the life of the mortgage.
Recently a client asked if a sizable payment being made from their Ex-spouse’s 401k to them was taxable.
This type of distributions is called a QRDO, Qualified Domestic Relations Order. This is how it generally works:
A QDRO allows a former spouse to receive a predefined amount of their spouse’s retirement plan assets. For example, a QDRO might pay out 50% of the account’s value that has grown during the marriage. The funds, as a result of the QDRO, could then be transferred or rolled over into an IRA for the beneficiary spouse.
So to answer my client, if the QDRO is sent directly to a new IRA, no, it will not be taxable.