3 years ago
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admin
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Sticky
When was the last time you had to decide whether to pay cash or to buy on credit?
What is your money worth and what is the cost of holding on to it and going into debt instead?
Let’s set aside the risks of using money you don’t have for the time being and just talk about making that decision.
If you are faced with doing some kind of calculations – might I suggest you look into the calculators in the resources section of our website? You might be surprised at the results.
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3 years ago
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admin
Pink or blue. Right or left. An apple or orange make an array of decisions daily: some are simple and inconsequential while others could have more impact in later times. Somewhere in the upper side on that scale lies a decision about a Roth account as a retirement savings choice.
The question of Roth has become quite the contested issue among financial professionals and the general public alike. In recent years, Roth has gained some momentum and more employers are offering Roth 401(k) in addition to traditional 401(k) programs.
The biggest difference between a Roth account and a non-Roth retirement account is that you contribute to it with after tax dollars and consequently the withdrawals are income tax free if made after age 59. It can only be funded with earned income including alimony but not an investment income or gifts.
There are several conditions and benefits to consider in deciding for Roth.
Current marginal income tax rate vs. marginal tax rate in retirement:
For a young worker who has a very low current income tax rate and pays no or little income tax, Roth is a powerful option. Consider a teenager who works at her first job making a few grand a year. She can put a way all of her earned income up to $5,000 in a Roth IRA in 2011 that can grow tax-free. If she makes only five annual $5000 contributions and the account grows at annual rate of 8%, her nest egg will grow to $468,394 over 40 years. So when your teenager pesters you wanting to hang out with you instead of going out with his friends, this would be a great topic of conversation!
Diversification and Maximum Contributions:
Consider a recently empty nested couple who file a joint income tax return. The husband maxes out his retirement contributions through his employer and the wife brings in “spending money” through her voice lessons to students. If they are trying to save extra in a tax investment account, she should consider a uni Roth 401(k) in which she can contribute up to $22,000 with catch up amount if she is over 50 years of age. This will offer a measure of diversification in that their retirement savings are divided among tax deferred accounts as well as a Roth account. It also means that since her contribution is made with after tax dollars, she is putting away more for retirement than she would in a regular retirement account.
Flexibility:
If you withdraw from regular retirement accounts before 59 ½, this withdrawal will be taxed as regular income (there are a few exceptions) plus an additional 10% penalty on the amount of distribution. With a Roth account, which follows first in first out rule, you can always withdraw your contribution amounts without tax or penalty. If you dip into earnings you may be subject to tax and or penalties. Another key benefit is that you do not have Required Minimum Distributions from a Roth account the year you turn 70. If you fail to withdraw RMDs from a regular retirement account, the penalty is 50% on the short fall. Thus, you can have a greater flexibility in how much and when you withdraw from you Roth accounts or if you desire to leave the funds to your heirs if not needed. In addition, there is no lower or upper age limit to contribution so long as you have earned income. Even if you work past 70, you can continue to contribute to your Roth account.
If you expect to be in a higher or same income tax bracket in retirement or you desire maximum savings, diversification and flexibility, a Roth account can be a very powerful tool in retirement planning. If you have further questions on Roth, do not hesitate to contact me at bg@beaconfinancialmgmt.com or 760-473-3335.
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3 years ago
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admin
Don’t Know Where Your Money Goes
Quoted in “Don’t Know Where Your Money Goes? That’s a Problem” – WSJ
I contributed to an article by a WSJ reporter about the importance of budgeting: you can read her full article here. http://www.wsj.com/articles/dont-know-where-your-money-goes-thats-a-problem-1461835800?mg=id-wsj
The most fundamental element in personal finance is budgeting or cash flow management. As the saying goes “All roads lead to Rome,” in personal finance, everything flows from cash flow.
But most surveys show that only 32% of Americans have a budget for their households which means a whopping 68% do not. Often times money issues are one of the biggest causes for divorce (22%) only behind basic incompatibility (43%) and infidelity (28%) according to a Certified Divorce Financial Analyst Professionals survey. After a certain income level, your financial security almost becomes irrelevant to how much money you make if you do not watch your spending. This is why we often hear about celebrities or pro athletes going bankrupt even after earning stratospheric incomes, (78% of NFL players go broke within 2 years of retirement and the numbers for NBA players are 60% and 5 years) while unassuming ordinary individuals leave an extraordinary amount of fortune relative to their incomes to universities, hospitals or other causes dear to their hearts. If your cash outflow consistently exceeds cash inflows, you will incur debt which eventually will blow up in your face.
So what are some basic tips that can help you build a budget and stick to it?
Pay yourself first.
Even as we are talking about spending habits, the first item on your budget should be savings. While you are doling out money to everyone (grocers, bankers, car makers, doctors, educators, clothiers and etc.) for sustaining your current life, you cannot neglect your older self’s needs in the future. It could be for 5 years down the road or 50 years down the road. Most industry experts recommend 10-15% of your income should be earmarked for retirement savings.
Be honest and be thorough and be diligent.
Start out by backtracking the past 3-6 month’s spending to see a trend or range. Create every spending category possible and record every spending that you incur. Avoid a miscellaneous category altogether, as it amounts to a black hole in which you cannot see exactly where the money is spent. This will help you be more accountable for what you spend money on. Fast food or Starbucks runs can rake up hefty amounts without you realizing.
Goldilocks: Be realistic.
If your budget is too tight, you are likely to give up. If your budget is not tight enough, you will not likely achieve cost-cutting measures needed to ensure positive cash flow each month to save for different goals either short term or long term.
Reward yourself.
If you successfully stay within your budget, reward yourself a little. If this feat was achieved by cutting out frequent meals out, plan to have a nice dinner out as a special treat and experience. Similar to people trying to lose extra weight needing to mind calories consumed, you need to practice mindful spending rather than impulse spending.
Streamline to one card.
Avoid having multiple credit cards. The more cards you carry, the more likely you will rake up balances in all of those accounts. That is why they offer you those cards. Consolidating will also make it easy for you to keep track of your spending and save you time.
Budgeting can seem daunting at first but it is not that complicated. Just like anything else, you need to plan your spending and stick with it. If you do not control your money your money will control you. By taming your budget, you can achieve financial stability which will allow you to live the life you would like to live.
Boonseon Gudmundsen, CFP®
Beacon Financial Management LLC
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