Should you make pre-tax or Roth 401(k) contributions? I recently read this article by Penelope Wang called “The Great Retirement Account You’re Not Using” that argues for Roth contributions. However, I still think pre-tax contributions make more sense for most people. Here is my response to each of her main arguments: Continue reading “In Defense of the Traditional 401(k)”
Many friends of Financial Finesse and readers of our daily blogs send us direct questions and various inquiries through our social media sites. Occasionally we will highlight some of the more frequently asked questions and provide you with a summary response. In this version of the Ask-A-Planner mailbag, we will examine a couple of questions regarding Individual Retirement Accounts. To help examine these questions, I thought I’d turn to Paul Wannemacher, one of our resident financial planners and a recent addition to the Think Tank at Financial Finesse, for some guidance. Continue reading “Ask-A-Planner Mailbag”
In last week’s blog post, we examined the flexibility of Roth IRAs. Perhaps the most appealing feature of Roth IRA accounts is the tax-free growth of earnings. If you expect to be at the same or a higher tax bracket, the Roth IRA is definitely worth considering based on the prospects of future tax savings. Even if you don’t have a strong opinion as to where your future income tax bracket will be when you need access to your funds, it may prove beneficial to have this added feature of tax diversification. Continue reading “Should I Keep My Emergency Funds in a Roth IRA?”
Roth IRAs are increasingly becoming one of the most popular savings vehicles for retirement. The most appealing feature of the Roth IRA is that these type of retirement accounts offer tax-free withdrawals of earnings at age 59 ½ as long as the account has been open for at least 5 years. The term “tax-free” is quite appealing in the current economic environment where higher future income tax rates appear to be a real possibility. Millennials and Gen Xers, who may not be in their peak earning years, may be particularly prime candidates to contribute to a Roth IRA. Perhaps that is one reason why the growth in Roth IRAs far outpaces that in traditional IRAs as more account owners are choosing to use after-tax dollars to save for retirement to receive the tax break during retirement. Continue reading “Should a Roth IRA Be Part of Your Emergency Safety Net?”
April 15th is just a few days away and while most people think of it as tax day, it’s also the deadline to contribute up to $5,500 (or $6,500 if you’re over age 5o or over) to a Roth IRA for 2013. Why is this so significant? Well, here are 5 reasons it’s a good idea: Continue reading “5 Reasons to Contribute to a Roth IRA in the Next 5 Days”
Earlier this month, a colleague of mine forwarded me this article by Jeffrey Levine. In the article, he outlines some of the changes President Obama is proposing in his 2015 budget. While it is unlikely that these provisions will be enacted anytime soon, it does raise the specter of possible changes in the future so it’s important to understand the short and long term ramifications for you and your retirement plans if they ever do come to pass. Here are some things to consider, along with my take on each proposed provision: Continue reading “What Obama’s Budget Proposals Could Mean For Your Retirement”
Emergency funds are the Rodney Dangerfield of financial planning: they get no respect. While financial experts typically recommend keeping at least 3-6 and sometimes even as much as 9-12 months’ worth of necessary expenses in cash reserves for emergencies, no one really likes seeing all that money sitting somewhere earning less than 1%. Here are some ways to make that emergency money work harder for you: Continue reading “How to Make Your Emergency Fund Work Harder for You”
Millennials shouldn’t worry about retirement! OK, now that our CEO, Liz Davidson, and the rest of the research team at Financial Finesse are having heart palpitations (and the CFP® Board has started the process of stripping my credentials) I must clarify this statement. I don’t mean that Millennials (a.k.a “Gen Y”) should ignore saving for the future. My point is that as the saying goes, “Sometimes it’s not what you say; it’s how you say it.” When it comes to financial planning, we often give the right message in the wrong way.
Think about any commercial that you’ve seen for retirement planning or investing. Have any of them been geared towards anyone under 50, let alone 40? There is nothing wrong with the retirement and investment industry focusing their attention on the Baby Boomers – they are the ones that are concerned about a life changing event just around the corner and frankly they have money to invest. Unfortunately, if there is any generation that needs to be prepared financially, it is our youngest generation in the workforce.
As the recently released Retirement Preparedness report from Financial Finesse points out, employees under 30 are actually less prepared for retirement than they were last year and will face higher medical costs, longer life expectancies, and the potential for much higher inflation and higher taxes. So how do we fix it? Maybe we don’t talk about retirement. Think about it. When you were 26, were you worried about what you were going to do after your career was over or were you trying to figure out what in the heck you were going to do for a career?
There is a lot of talk about various methods of reaching Millennials – social media, smartphone apps, and SEO marketing, but in the end, it doesn’t matter how we deliver the message if the message doesn’t resonate. What does matter to someone early in their adult life? I would suggest that the motivating factor when I was a young adult was being able to make my own decisions. From the time we are teenagers and get a taste of freedom, we tend to crave all the freedom we can get our hands on.
So what does freedom have to do with retirement? Everything! Think about it. What retirement really means is that you have options: Do you want to keep working or not? Do you want to live here or travel, or maybe relocate to the place you’ve always wanted to live? In many ways, retirement is the ultimate expression of that teenage craving for the freedom to do whatever we want.
So if you are a human resources professional trying to boost 401(k) participation, a financial planner working with younger clients, or a concerned parent talking to your kid about money, there is a key message here when talking to Millennials about financial freedom. Don’t dwell on retirement. Emphasize that money can’t buy you love or happiness (once your basic needs have been met), but it can buy you freedom to live life on your terms.
For all of the doomsday talk about the financial challenges facing Millennials in so many ways, they have the greatest opportunities of any generation. If a young person today takes advantage of their full 401k match and they max out their health savings account and contribute to Roth IRAs for an entire career, they have a great chance to build wealth. In an era with massive student loan debt it won’t be easy, but if we can help young Americans understand that the biggest limitation on them is not their age but their debt, they will find a way to solve it.
It’s what we do as Americans. Then Millennials will be in a position where they can use the money freed up by paying off their student loans and increasing their savings of all types. Many employees also have the opportunity to set up an automatic increase in the percent they set aside in their 401k every year. Those factors could help them accumulate a bigger nest egg than their parents or grandparents could have imagined.
If you are in the Millennal generation and you are burdened with student loan debt, imagine having your student loans paid off in 5 years. What if you could buy a house and still be debt free by 45? What would life look like if you had true financial freedom (a.k.a. “kiss my back side money”)?
It can happen if you make small changes to help fund the big picture, but it starts with believing it is possible. The reality is that Millennials need to seriously focus on creating and following a plan that will give them financial independence. However, the traditional retirement messages of previous generations needs to be re-framed or Millennials could become the “lost generation” when it comes to retirement.
So go to iTunes , download some of my favorite 80’s rock and Don’t Stop Believing that you can take control of your financial present and future! (Yes, many of us Generation X types are as cheesy as an Adam Sandler or Vince Vaughn movie.)
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With tax rates where they are today, and potentially going higher in the future due to the ever-increasing national debt and Congressional spending habits, I get asked a lot of questions about how to minimize taxes. That’s always an interesting conversation because taxation comes in many forms (taxes on income, capital gains, and interest, not to mention all of the consumption taxes we pay) and across many timelines. Are we looking at ways to minimize this year’s tax bite or our lifetime tax bite? Sometimes there are tradeoffs. Continue reading “Let Open Enrollment Help You Minimize Taxes”
Unless you’ve been living on a deserted island, you’ve probably heard about the exploits of my now former mayor, Bob Filner. The most notorious were the allegations by numerous women of various forms of inappropriate flirting, sexual harassment and possibly even assault. Less provocative, but also quite disturbing, were reports of improper demands for financial concessions from developers and the misuse of a city credit card for personal expenses. Continue reading “How to Say “No” to Your Boss”
Updated February, 2018
A while ago, I wrote about some reasons to consider contributing to a Roth IRA. But if you earn too much to contribute to one, these arguments may seem like a moot point. However, there are a few things to keep in mind before completely writing off the Roth IRA. Continue reading “How to Get Around Roth IRA Income Limits”
With some of the recent stock market volatility, a common question seems to be emerging from the employees I speak to in workshops, webcasts, and consultations: where is the best place to invest these days? Believe it or not, even as a financial professional who has been in the industry for nearly 19 years, I still don’t know the answer to that question. The truth is, like many of you, I’ve had my share of good investment decisions and bad ones. What I can tell you is that we learn from experience so allow me to share my experiences with you in the hope that you don’t repeat my bad decisions and perhaps follow in my good ones instead. Continue reading “The Good, the Bad, and the Ugly: The Best & Worst Investment Decisions I’ve Ever Made”
Back in early 1999, as Internet stocks were all the rage, I invested that year’s Roth IRA into the Putnam New Opportunities Fund, which had double digit returns for their 1 and 3 year historical performance. Now, I know past returns don’t indicate future performance, and I also had that little voice in the back of my mind that was saying it was too good to be true, BUT the Putnam wholesaler had recently visited my office and was saying how hot the fund was, and as a broker myself, I was able to buy in at NAV, meaning I didn’t have to pay the front end sales charge. I couldn’t resist. Continue reading “Following the Herd to My Worst Investment Ever”
In his blog post this week, Scott Spann wrote about some reasons not to contribute to a Roth IRA. But there are also lots of reasons a Roth IRA can make sense. Let’s take a look at each of his arguments: Continue reading “Reasons to Contribute to a Roth IRA”
Roth IRAs are not a secret anymore since they first became available in 1998 as a way to use after-tax money to save for retirement. The biggest benefit is that as long as the Roth IRA account has been open for 5 years and withdrawals take place after age 59 ½, you never have to pay taxes on the earnings (contributions are always accessible without taxes). Tax-free earnings growth has a lot of appeal for younger generations and people not in their peak earning years who expect to be in a higher tax bracket during retirement. Continue reading “Reasons to Stay Away From a Roth IRA”
When it comes to saving for retirement, most people know to contribute to their employer’s retirement plan (at least enough to max out their employer’s match) but there are also other ways of saving for retirement with some unique benefits that are not quite as well known. Here are 5 that you want to take advantage of if possible: Continue reading “5 Ways to Save for Retirement With Some Surprising Benefits”
One of the most common questions we get is whether to prioritize paying down debt, building up savings, or investing for retirement. Ideally, of course, we would do all three but most of us have limited dollars with which to work with. So what should take priority? It’s a topic that has generated some disagreement among some well-known financial gurus. Here are some guidelines to follow: Continue reading “What Comes First: Saving, Investing, or Paying off Debt?”
Last week, I received a difficult but important question from a good friend who wanted to know what to do when an IRA account is inherited from a loved one. His mother is in the final stages of a long battle with cancer and the need for hospice care had prompted my friend and his family to start the emotional process of making sure her estate plan is in order. Unfortunately, most families wait until it’s too late to have these difficult talks but in this case, my friend’s question was driven by the difficult ordeal his family experienced following the sudden death of his father about five years ago. They didn’t want to get blindsided this time around but weren’t sure about what tax laws and potential surprises were waiting for them. Continue reading “What Happens When You Inherit an IRA?”
Last year, employees got a break, a 2% bump in their take home pay, thanks to the payroll tax holiday enacted by President Obama to try to boost the economy in 2011- 2012. The employees’ share of Social Security taxes were reduced from 6.2% to 4.2% for a time. Like all good things, it came to an end and now employees are feeling the squeeze. Continue reading “Money Tight? Make it Work Harder For You”
Imagine I told you about a special savings account that you could contribute to with money automatically deducted from your paycheck every pay period. Sounds like a great way to save, right? Now imagine that this account earns no interest and has no possibility of any growth or future earnings. Continue reading “The Worst Savings Account in America”
