Retirement Archives - Page 3 of 10 - NorthStar Capital Advisors

Inherited IRAs

Inheritances received via an IRA can be advantageous since you can choose to stretch the required distributions across your life expectancy, giving the assets more time to grow (plus taxes aren’t due until withdrawals are made). Here are key best practices to keep in mind:

When you inherit an IRA from anyone other than your spouse, you can’t roll it over into your own IRA
Instead, you have to retitle the IRA so it is clear the owner died and you are the beneficiary
If you move the account to a new custodian, make sure it is a “trustee to trustee” transfer”
If the check is mistakenly made out to you, the IRS will consider it a “total distribution” subject to tax and if you are anyone other than the surviving spouse, it would effectively end the IRA
Be aware there are deadlines for all of these actions
If the IRA owner dies after age 70 1/2 (when required withdrawals start) and didn’t yet take a withdrawal for the year, the heir has to do so by December 31
(if you miss the deadline, you are subject to a 50% penalty on the amount you should have withdrawn!)
If you are a nonspouse beneficiary, determine the required distribution by looking up your life expectancy on the single-life table in IRS publication 590
(most IRA custodians will calculate the required withdrawal amount for you but you need to make sure they are using the inherited IRA calculation)
Once you receive a 1099 form, confirm that the custodian properly indicated the distribution as a code “4”

Know More, Make More

A ground-breaking academic study finds that more financially knowledgeable people earn a higher return on their 401(k) retirement savings.

Dr Robert Clark (NC State University), Dr. Annamaria Lusardi (George Washington University), and Dr. Olivia Mitchell (University of Pennsylvania) analyzed a unique dataset that combined 401(k) performance data for 20,000 employees plus financial literacy data for the same workers.

Investors deemed to be more financially knowledgeable than peers enjoyed an estimated 1.3% higher annual return in their 401(k)s or other defined contribution plans than those with less knowledge.

According to the study’s authors:
“We show that more financially knowledgeable employees are also significantly more likely to hold stocks in their 401(k) plan portfolios. They can also anticipate significantly higher expected excess returns, which over a 30-year working career could build a retirement fund 25% larger than that of their less-knowledgeable peers.”

Financially savvy people tend to save more and are more likely to invest those savings in the stock market. But past studies haven’t clearly demonstrated that these people necessarily make better investment decisions. The authors look at patterns in 401(k) retirement accounts and find that more sophisticated investors do indeed get better returns on their savings.

Source: “Financial Knowledge and 401(k) Investment Performance”

Hedgerows of Retirement

“We were rehearsed endlessly for attacking beach defenses but not one day was given to the terrain behind the beaches, which was no less difficult and deadly.”
— D-Day Battalion Commander

Coincident with the 73rd anniversary of the Normandy Invasion, Tony Isola wrote a great article highlighting the unexpected challenges the Allied forces encountered after they crossed the beaches. The farm lands of Normandy were carved up and fenced off by a dense network of difficult-to-penetrate hedgerows. Allied Forces were incredibly trained and prepared for the beach landings, but hardly a thought was given to the next stage of the battle.

As Tony points out, investors have their own hedgerow fortifications to surmount. There is great focus and effort put forth around saving for retirement, but what about the next stage of life? Questions and decision points include:

How long do I need to work so my money won’t run out?
What would be considered a “safe” withdrawal percentage from my funds?
When should I take Social Security; and what strategy should I use?
Do I need long-term care insurance?
Now that I am retired, should I invest my money differently?
How much will Medicare cost and what programs should I enroll in?
Can I afford to give cash to family members; and if I can, how much?
Have I updated all my beneficiaries and picked the right people to take over my finances to make the best decisions regarding my health if I cannot?
What am I going to do all day if my retirement is fully funded?
Should I take a cash balance or turn my funds into an annuity from my workplace retirement plan?
Do I own too much of my company’s stock?
Will my plan still work if we have another “Great Recession?”
When should I start taking money from my tax-deferred accounts; and how will this affect my taxes?

Answering these with confidence, constructing a solid plan based on these answers, and executing that plan with discipline are the real reasons why people who have accumulated wealth work with a trusted advisor.

Source: TM

Code Red! 8 Ways to Permanently Wipe Out Your Retirement Savings

Dana Anspach at MarketWatch wrote about 8 financially devastating mistakes (aka “Code Reds”) that must be avoided:

1. Believe in a stock
The company you work for is doing well. You understand the potential of the business. You should own a lot of company stock. After all, it shows your level of commitment, right?
WRONG! CODE RED!
You can lock in lifestyle by taking risk off the table. If trusted advisers are telling you to reduce risk, listen. You can’t take your “belief” in your company stock to the bank. Owning a lot of company stock doesn’t demonstrate a commitment to your company; it demonstrates a lack of commitment to your own personal financial planning.

2. Get reeled into real estate
Rental real estate is a good way to build wealth with someone else’s money, isn’t it? I mean, that’s what the infomercials say.
WRONG! CODE RED!
Investing in real estate is a profession in and of itself. With real estate prices on the rise again, don’t get reeled in with the lure of easy passive income. It isn’t as easy as it looks.

3. Follow a Tip
An opportunity to double your money is an investment opportunity worth pursuing. It could change your life, right?
WRONG! CODE RED!
Tips are great for your waiter or waitress. But where you family’s future is concerned, avoid the tips, and stick with a disciplined and diversified approach.

4. Change lanes — every year
Smart investors watch the market and frequently move money into the latest high performing investment, right?
WRONG! CODE RED!
You’ve probably noticed if you constantly changes lanes on a backed up highway, always trying to inch ahead, you usually end up farther behind. Driving this way isn’t effective; investing this way isn’t effective either. Pick a disciplined strategy and stick to it. Jumping from investment to investment is only going to slow you down.

5. Play the currency cards
Experts can deliver higher returns, right? Find someone who knows how to trade, and you’ll be set.
WRONG! CODE RED!
If experts could generate such high returns, why would they need your business? Don’t play the currency cards, the expert cards, or fall for any kind of outlandish promises. I’ve yet to see one of these programs work the way it was marketed.

6. Follow your ego
Better investments are available to those with more money, right? If you get the opportunity to participate in something exclusive, it is likely to deliver better returns.
WRONG! CODE RED!
If someone appeals to your ego, walk away. When it comes to investing, the only thing I’ve seen egos do is help someone lose money.

7. Follow their ego
You can trust prestigious people in your community. That’s why you should do business with them, right?
WRONG! CODE RED!
Checks and balances are good in government and in investing. One way to make sure checks and balances are in place is to work with an investment adviser that uses a third party custodian. The third party custodian sends account statements directly to you. The investment adviser can make changes in your account, but the transactions are reported to you directly by the custodian, who isn’t and should not be affiliated with the investment adviser.

8. Leverage up
Borrowing at low interest rates and investing in high growth assets is an excellent way to accumulate wealth, isn’t it?
WRONG! CODE RED!
Think twice before borrowing to invest. It causes ruin more often than it causes riches.

Visit MarketWatch to read Anspach’s full article.

5 Big Retirement Mistakes

#1 Not paying for financial guidance
People who have no problem paying for the services of an accountant or lawyer often balk at the prospect of cutting a check to pay for investment advice. Instead, they rely on “free” help from retirement advisers they meet at banks, brokerage firms and retirement seminars.

#2 Investing in something you don’t understand
If your financial adviser recommends an investment you can’t explain to someone else, just say no. It will likely carry steep fees (to pay steep commissions) and be less wonderful than it is touted to be.

#3 Supporting your adult children
You might be tempted to help them with a down payment or living expenses, but unless you are certain that you have enough to ensure your own survival, don’t do it.

#4 Low-balling elder-care costs
When planning for retirement, few people think about how much they might end up spending to support elderly parents. Inflation and longevity could erase the purchasing power of the children’s pension and savings, leaving them with too little to live on, let alone cover medical expenses.

#5 Underestimating how much you will need
It is easy to underestimate the impact of inflation and longevity, or the cost of health care, supporting family members or caring for a spouse with Alzheimer’s disease or cancer.

Source: Wall Street Journal

Quick Check: Are Your Retirement Savings On Track?

The two greatest impacts on your retirement savings over time are starting early and saving consistently. Beyond that, how do you know if you’re on track to have enough set aside to retire comfortably? Fidelity Investments recently published convenient “rule of thumb” that provides convenient, age-based targets to help you gauge your progress.

What’s the end game look like?
If you’ve saved eight times your annual salary by your last year of work before retiring, you should have enough money to replace 85% of your annual income for a 25-year period, including social security.

Age-based targets for retirement savings. For example, at age 35 you should have saved one times your annual salary. By age 55 you should have 5 times your salary. Ultimately retire at age 67 with eight times your annual salary set aside in retirement savings.

Here are the key milestones for getting to 8x and beyond:

age 25: start saving for retirement beginning at 6% of annual salary and increasing this by 1% per year until it reaches 12%; employer provides a 3% matching contribution
ages 31-67: setting aside 12% of annual income for retirement savings with an additional 3% matching contribution from the employer
age 35: you should have saved one times your annual salary
age 45: you should have saved three times your annual salary
age 55: you should have saved five times your annual salary
age 67: retire with eight times your annual salary in retirement saves
age 67-92: live off your retirement savings

Recognize that this is a broad guide and each person’s requirements will vary by the specifics of their situation. Nonetheless, this provides a quick and easy reality check.

What if you check your actual retirement savings and you’re coming up short against these targets? Try to increase your retirement contributions to close the gap. Sit down with an investment advisor to review your investment portfolios and make sure they are optimized for success.

Age-based retirement savings targets for an individual making $100,000 per year.

Source:
Fidelity Outlines Age-Based Savings Guidelines to Help Workers Stay on Track for Retirement

4 Weeks Until an Important Deadline

Here’s an important reminder if you have an individual retirement account (IRA) or are considering opening an IRA. 2016 contributions to IRAs can still be made up through April 18, 2017.

[Tax day falls on April 18, 2017. Usually, April 15 is the day taxes and IRA contributions are due. But in 2017, that falls on a Saturday. On Monday, the District of Columbia celebrates Emancipation Day. That affects taxes the same way federal holidays do. Emancipation Day is normally April 16, but that’s a Sunday. Therefore, the tax deadline is pushed out to the following Tuesday, April 18.]

Make it a double? If you really want to make the most of the growth potential that retirement accounts offer, you should consider making a double contribution this year: a last-minute one for the 2016 tax year and an additional one for 2017, which you’ll claim on the tax return you file next year. That strategy can add much more to your retirement nest egg than you’d think.

2016/2017 Annual IRA Contribution Limits*

Traditional/IRA Rollover: $5,500 ($6,500 if you are 50 years old or older)
Roth IRA: $5,500 ($6,500 if you are 50 years old or older)
SIMPLE IRA: $12,500 ($15,500 if you are 50 years old or older)
SEP IRA: $53,000 (2016); $54,000 (2017)

*Note: The maximum contribution limit is affected by your taxable compensation for the year. Refer to IRS Publication 590 for full details.

The savings, tax deferral, and earnings opportunities of an IRA make good financial sense. The sooner you make your contributions, the more your money can grow.

If you have any questions or would like to make an IRA contribution give us a call at (704) 350-5028 or email info@nstarcaptical.com.

What’s Your Wealth Index?

How do you know the health of your wealth? Are ahead of the curve or are you behind? Do you need to be saving more or do you need to ease up and be less frugal?

The most complete and accurate way to answer these questions is to reference your financial plan (i.e., a formal, written, date-specific, dollar-specific retirement accumulation plan). But a quick, “back of the envelope” approach is to use the Wealth Equation. This metric was created by Dr. Thomas Stanley, noted researcher and author of the Millionaire Next Door.

Here’s the formula:

Expected Net Worth = 10% x (your age) x (your gross income)

So if you’re a 50 year old making $150,000, your Expected Net Worth is $750,000 (=0.1*50*150000). If you’re a dual-income family, you would use your total family income and average age of the two earners.

Now take your Expected Net Worth and compare it to your actual Net Worth (don’t know your actual Net Worth? see our special offer below*). Create your Wealth Index by taking the ratio of those two numbers:

Wealth Index = (Actual Net Worth) / (Expected Net Worth)

Your Wealth Index tells you where you fall into the following categories:

Under Accumulator of Wealth (UAW) Wealth Index ≤ 0.88
Average Accumulator of Wealth (AAW) 0.88 < Wealth Index < 1.84
Prodigious Accumulator of Wealth (PAW) Wealth Index ≥ 1.84

Continuing with our example above, imagine that you are that 50 year old with an actual Net Worth of $937,500. Then your Wealth Index is 1.25 (=937500/750000) which puts you at the moderately high end of the Average Accumulator of Wealth (AAW) category.

Ideally, you want to be a Prodigious Accumulator of Wealth (PAW), in other words, a hyper saver who is consciously building a tremendous amount of wealth. If you’re a PAW (i.e., you have a Wealth Index at or above 1.84), Dr. Stanley calls you “balance sheet affluent” because you have an army of dollars working for you and you’re doing a great job of accumulating assets.

If you’re a AAW (Wealth Index between 0.88 and 1.84) you’re probably right on track. If you’re a UAW (Wealth Index below 0.88) you’re likely behind the curve and need to save more and spend less to grow your financial health. Remember you want to be saving between 15% and 20% of your gross income to fund your retirement.

A note to younger folks:
If you’re in your 20s and 30s (or even early 40s), your expected net worth in the Wealth Equation may be a bit too ambitious since Dr. Stanley designed this for people in their 50s and above. It still serves as good general reference point. For younger savers, Dr. Stanley suggests the following approach to ramping up your retirement savings:

In your 20s, save at least 5% of your income
In your 30s, save at least 10% of your income
In your 40s, save at least 15% of your income
In your 50s, save at least 20% of your income

We would urge you to try to accelerate this so you’re saving 15% to 20% as soon as possible to assure you will enjoy a happy and well-funded retirement of 30+ years.

*Need help calculating your actual Net Worth? Send us an email at info@nstarcapital.com and we’ll send you a free tool to calculate it quickly and accurately…forever!)

Giving the Gift of Financial Planning

A Lifetime of Financial Knowledge Wrapped Up in a Bow

Stuck for ideas on what to give newlyweds, graduates, or new parents for Christmas or Hanukkah? Consider something nontraditional this year that will last a lifetime and never go out of style: a visit with a financial planner.

Giving someone a financial planning consultation is a unique way to show you care, and it can help set up a loved one for a successful financial future. Newlyweds, graduates, and new parents all are at the start of a new phase of their lives. A financial planning gift provides them with something that may last for decades.

Those experiencing life’s transitions will also face financial challenges. Whether it’s learning to budget as a couple, understanding retirement plan options at the first job after graduation, or starting to think about paying for college, many important financial decisions await young people today. You can help by putting financial planning front and center.

Maintain the Wedded Bliss

Money and finances are among the top issues that cause marital discord. A financial planner can help strategize for a happily-ever-after financial life. A good planner will spend time talking to the couple, helping them determine their mutual financial goals. There are so many topics a financial planner can help with, including: managing household expenses; reviewing assets, debts, and credit reports; creating a budget; discussing future goals and creating mutual goals such as buying a home; analyzing benefits; updating wills; and reviewing insurance coverage.

Help Graduates Start Right

Once the diploma is hanging on the wall, it’s tempting for new grads to overspend, racking up credit card debt and a new car loan when what they really need to be worrying about is paying down student loans and planning for retirement. A gift of financial planning can help a new graduate establish short- and long-term financial goals and develop a budget to meet those goals. A financial planner may also help the grad deal with the new challenge of filing taxes and make recommendations on how to allocate investments into 401(k) or other retirement savings vehicles.

Bringing Up Baby, or Babies

The government estimates that a middle-income family will spend more than a quarter of a million dollars to raise a child until he or she is 18. New parents will benefit by working with a financial planner to figure out how much money they’ll need to raise their child. A financial planner can help them create a savings safety net, create and stick to a budget, advise about life insurance and wills, and talk about saving for college.

Purchase a financial planning gift certificate for someone you care about and know you’ve made a lasting contribution!

HSA = Tax Triple Play!

Tis the season to select your health insurance plan either through your employer’s offering or the private insurance market. If you’re considering a high-deductible health plan (HDHP), keep in mind that many (but not all!) come with the fantastic opportunity called a Health Savings Account (HSA).

We love HSAs because they do two things:

They help you pay for your medical costs either today or in the future
They are triple tax advantaged

The government makes these accounts triple tax-advantaged because they want to incentivize you to save for your future medical costs. We know as the nation greys and gets older, we need to have a pot of money set aside to cover our potential out-of-pocket costs.

Here’s the triple tax saving advantage:

When you have an HSA account attached to a high-deductible plan, you get to take a tax deduction on your current your contribution. For families, it’s $6,750. This means you get to lower your adjusted gross income by $6,750, a tax savings of potentially around $2,000 if you take into account state and federal income taxes. That’s $170 of savings each month if you do a little rounding. That’s pretty incredible. That’s step 1 – you get a tax deduction in current year. If you’re age 55 or older, you eligible for a $1,000 “catch-up contribution” so your can lower your AGI by $7,750 (thus lowering your tax bill by ~$2,300 or $190 a month).
Layer two of the triple tax advantage is it grows completely tax deferred meaning it is growing without taxation on any appreciation, any dividends, or any income that’s going on a long as that money is sitting in the HSA account.
Here’s the third layer and really the knockout that makes it an awesome savings tool for the future. If you use the money in the future for medical expenses, your HSA distributions are completely tax free.
(Here’s another cool thing. Once you reach retirement, you don’t have to use your HSA for medical expenses, but if you want them to be tax free, it needs to be medical expenses.)

Be careful when you select a high-deductible health plan (HDHP) to make sure it qualifies for HSA eligibility:

HDHP minimum deductibles: self-only $1,300; family: $2,600
HDHP maximum out-of-pocket amounts: self only $6,550; family $13,100

HSAs can be one of your best friends for the future.

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