401(k)

Happy Holidays: The Gift of Financial Self-Care

Financial Self Care

We originally published Happy Holidays: The Gift of Financial Self-Care in December 2016 and decided to give it a refresh for 2021. 

The holiday season is a once-a-year mash-up of magic and madness. Indeed, it can be a challenge to find balance between the two. The moments of wonder with family and friends go hand-in-hand with the chaos of shopping, rushing, eating, and drinking–sometimes to excess. ’Tis the season to be jolly, and the season only comes once a year – so enjoy!

And as you make your Gift List, be sure to treat yourself to something special: the gift of financial self-care. The enjoyment and reward will last longer than anything you can buy in a store.

Get a head start on New Year’s resolutions by setting fresh financial goals for the new year now. Then, you can truly embrace the eat-drink-and-be-merry holiday philosophy, knowing you have set yourself on a path towards financial freedom.

Financial Self-Care: Three Easy Steps to Begin

1. Automate your savings program.

Avoid the anxiety of wondering if you are saving enough by automatically setting aside money from your income each month. Either set up a transfer from your checking account to your investment account, or contact your payroll department to have dollars sent directly from your paycheck to your investment account.

  • You can direct your savings to either a taxable brokerage account (unlimited amount), or to an IRA or Roth IRA if you’re eligible.
  • This automated savings program will supplement your monthly contribution to a 401(k) or 403(b) and, if the funds are invested, will have the added benefit of dollar-cost averaging, which tends to boost returns over the long haul.

2. Open your investment account statements – both retirement and taxable – at least quarterly, and review the contents.

Financial self-care involves giving yourself the gift of knowledge. Knowledge is power, and the more you learn, the more in control you will feel. “Clueless” is a 1990s coming-of-age comedy, not a way to feel about investments! Things to look for:

  • Familiarize yourself with your financial statements, and call your custodian or advisor to ask about anything you don’t understand.
  • Is all your money invested, or have you unintentionally left cash in the account that isn’t working for you?
  • What is your Big Picture – otherwise referred to as your asset allocation? How much is invested in stocks, and how much in bonds? Are you comfortable with the allocation knowing that a higher percentage of stocks means greater volatility? Conversely, are you content with the level of bonds, knowing the returns may be lower than what you need to reach your goals?
  • What is your year-to-date rate of return? How does this measure of investment performance compare with your financial objectives?

3. And finally, do something about those old 401(k)’s you’ve almost forgotten about.

Like the reliable jacket that’s been languishing in the back of a closet, those forgotten accounts are an easy refresh to your financial “wardrobe.” Roll over an old 401(k) into your current 401(k) if your plan allows, or into an IRA account. (It’s likely you already have an IRA, so it means receiving one less statement each month/quarter!) If you don’t like to invest, the easiest approach is to roll the old account(s) into your current 401(k) and invest it in your existing choices.

Financial Self-Care = Satisfaction, Empowerment, and Confidence

You know the feelings you get when you finally purge your closet (or even clean just one messy drawer)? Multiply the accomplishment factor by about one hundred, and those are the feelings that result from completing something on your financial self-care check list. Pat yourself on the back – this is a gift that will keep on giving, long into the future.

Now, go out and Eat, Drink, and Be Merry… Happy Holidays!

Do you want to manage your money (and life!) better?

If you want to think differently about the relationship between your spending, your values and your happiness, then get your FREE copy of The Happiness Spreadsheet.

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Financial Housekeeping: What To Do with Those “Old” 401(k)s

There is no shame in owning multiple  401(k) or 403(b) accounts—the fact that they exist indicates a commitment to retirement savings. What may bring on a twinge of guilt (and rightfully so) is the neglect of these accounts, such as ignoring how the money is invested and leaving quarterly statements unopened.

Sound familiar? Rest assured that you’re not alone. When leaving an employer many people opt to take the easy way out and check the box next to “no change, leave funds in current 401(k).” Then they go on to their next job and forget about it. For some, this may be the best option, but for many, it’s not.

When is it a good idea to leave your 401(k) with your old employer?

  • If you have a small balance (usually less than $20,000–$25,000), otherwise you’ll pay a custodian (bank or brokerage) an annual maintenance fee to hold the account.
  • If you like the investment options available to you and don’t have the time or inclination to investigate the best place to invest outside the 401(k).

In other situations, it makes more financial sense to choose one of the other options available to you:

  1. Rollover the 401(k) to a self-directed IRA in an account at a new custodian. You can then manage it yourself with the help of an advisor or online investment service.
  2. Rollover the 401(k) into your new employer’s 401(k) if there are decent investment options available, you have a small balance, or you don’t want to manage it yourself.

There is a fourth option: cash out and pay tax and penalties (with some exceptions) on the balance. However, this is not a smart choice for most people.

There are many advantages to rolling over to a self-directed IRA:

  • Gives you more investment options, including exchange-traded funds and stocks.
  • Possibly reduces 401(k) record-keeping and other account maintenance fees.
  • Reduces the number of investment statements you receive.
  • Reduces the chances of duplication in your portfolio.
  • Decreases the possibility that you will “forget” about your money.

Here are the steps you need to take to rollover your old 401(k) into an IRA:

  1. Open an IRA account at your chosen custodian or let your financial advisor know that you want to rollover your employer retirement account and they will send you the account application paperwork.
  2. Contact the plan administrator for your previous employer company and ask to be sent an IRA rollover form or ask if you can execute the rollover on-line.
  3. Be sure to check the boxes for no tax withholding; because you are planning to roll the funds over, there will be no tax consequences. Some companies will conduct a trustee-to-trustee transfer, which means you won’t have to handle the money, but most send checks made out to the new custodian. The check will be written to the name of the new custodian, FBO (for the benefit of) your name and your new IRA account #.
  4. You will then mail the check to your new custodian to deposit into your IRA. There may be a one-time fee – $25-50$ to execute the rollover.
  5. It’s also important to know that the mutual funds you own in your 401(k), will most likely be sold and the money will be moved to a cash account prior to the rollover. This means that you must go invest the cash in your new IRA account after the rollover is complete.

Do you want to manage your money (and life!) better?

The Happiness SpreadsheetIf you want to think differently about the relationship between your spending, your values and your happiness, then sign up to get your FREE copy of The Happiness Spreadsheet.

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The Solo-K: Smart Retirement Planning for the Self-Employed updated for 2018

Solo-k Smart Retirement Planning Self-Employed

Solo-k Smart Retirement Planning Self-Employed

In 2001, the government gave self-employed workers a gift: a 401(k) plan that allows for greater amounts of tax-deferred income with less hassle to set up than any other retirement plan.

The plan, mostly called a Solo 401(k) or a Solo-k or one-participant plan beats traditional corporate 401(k)s in higher savings limits and in the ability to invest in a variety of options. With this plan, you are both an employee and an employer and make contributions for each.

You are an excellent candidate for a Solo-k if:

  1. You are a business owner or self-employed person.
  2. You have no employees, except for a spouse.
  3. You can and want to save a lot of money in certain years. You don’t have to make the same level of contribution
    every year.

Contribution limit

Up to $55,000 in 2018 (plus $6,000 catch-up contribution for those 50 or older) or 100% of earned income, whichever is less.

  • In your capacity as the employee, you can contribute up to 100% of your compensation or $18,500 (plus that $6,000 catch-up contribution, if eligible), whichever is less.
  • In your capacity as the employer, you can make an additional contribution of up to 25% of compensation.
  • There is a special rule for sole proprietors and single-member LLCs: You can contribute 25% of net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself.
  • The limit on compensation that can be used to factor your contribution is $275,000 in 2018.

All contributions are pre-tax. If you take withdrawals before age 59 1/2 tax is due as well as a 10% penalty. You must take RMD’s (Required Minimum Distributions starting at age 70 1/2.

Spouse element

If your spouse works in the business, you can potentially contribute up to $55,000 plus catch-up if age-eligible, doubling the contribution.

Other things to know:

  • Once the 401(k) reaches more than $250,000 you have to file paperwork with the IRS.
  • You can open a 401(k) at almost all custodians.
  • The contribution limits are annual, per person, so if there are other 401(k)’s it will limit the solo-k contribution.
  • You can also choose a solo Roth 401(k) which follows most of the same rules as the Roth IRA (except for the income limits, there are no income limits for a Roth 401(k).
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Simple Truth #5: The Longer You Live the More Money You Will Need

Retirement Planning Truth - The Longer You Live the More Money You Will Need

None of us knows how long we will live. But you can be sure that the longer you live the more money you will need – unless – you’re willing to reduce your lifestyle in retirement.

According to IRS-issued life expectancy tables, the life expectancy for a 25 year old is 83.2, for a 50 year old 84.2 and for a 75 year old it’s 88.4.

Retirement Planning Truth - The Longer You Live the More Money You Will Need

Simple Truth #5:  The Longer You Live the More Money You Will Need

The older you get, the more years you are expected to live. We can thank medical science and our healthier lifestyles for this increased longevity. In 1900, the average life expectancy was 47 years old!

Some of you reading this post may be so far away from retirement that you don’t think about it. You’re more concerned with building your career and trying to make enough money to do the things you want to do now.

Others may be realizing that it’s time to get serious about having a plan. Then there are those who are either near retirement or retired and know that the nest-egg has to last.

The bottom line is: once you stop earning income, you will start withdrawing from your savings to support your lifestyle. These savings (plus social security and if you are lucky, a pension) will be your new “salary.”  If you retire at age 65, your savings will need to last for 20-30 years or more.

How can you be sure that you will have enough?

Fortunately, an incredible amount of research has gone into determining how much a person can withdraw each year from their savings and still have enough to last to their life expectancy. The most widely accepted solution is the 4% withdrawal rate formula. This is how you calculate it:  Total value of savings at retirement x 4% =your  first year withdrawal amount.  Each year thereafter increase this amount by the rate of inflation (assume 3%).

The 4% Withdrawal Rate Formula Illustrated

Nancy

Nancy is 65 and about to retire. She has saved $1,000,000 that she has invested in stock funds (60%) and bond funds (40%). 4% of $1,000,000 is $40,000. This is the amount that Nancy can safely withdraw from her nest-egg in the first year to start her withdrawal program. She also is entitled to $21,600 in Social Security benefits.

Nancy will need to develop a lifestyle (all expenses plus taxes) around this amount of $61,600 a year to protect against running out of money. In each year thereafter, Nancy can increase this amount by the rate of inflation (let’s assume 3%), so in the 2nd year she can withdraw $41,200 and in the third year $42,436 and so on.

Unfortunately, Nancy’s  pre-retirement lifestyle cost $75,000 a year.  She delayed doing any kind of retirement planning and in result, will have to make some sacrifices or move to a less costly area to preserve her capital.

Sarah and Mike

Sarah and Mike are both 45 years old and plan to retire at age 66. They hired a financial planner to help them determine how much they need to save in order to retire and maintain their current $125,000 a year  lifestyle.  They have saved $750,000  so far which is invested in  80 % stock funds and 20 % bond funds.

They are expecting a total of $45,200 in social security benefits a year between the two of them. They are saving $12,000 a year each in their 401k’s but are not saving outside of their retirement plan.

The financial planner prepared a retirement projection (also referred to as a capital need analysis) for them and came up with the following:

Retirement Projection

Assuming a 7% average rate of return on their investments, a life expectancy of 90 years old and an average 3% inflation rate, Sarah and Mike will need to save approximately $1,600,000  more by age 66. With their current savings rate they will fall short. They need to increase their savings by $9000.00 a year to reach their goal.  Sarah and Mike plan to go back over their cash flow to see where they can cut back. Also, Mike is anticipating a big raise next year so it will get easier. They are relieved to have a plan and know what they need to do to reach their goals.

Since the longer you live the more money you will need, it pays to plan. Who would you rather be? Nancy facing some tough decisions right when she retires, or Sarah and Mike who have clarity and a road map for where they want to go.  Of course, there are going to be big bumps and little bumps along the way, but it pays to plan.

Do you want to manage your money (and life!) better?

The Happiness SpreadsheetIf you want to think differently about the relationship between your spending, your values and your happiness, then sign up to get your FREE copy of The Happiness Spreadsheet.

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Curtis Financial Planning