Pure’s Senior Financial Advisor, Bill Hodapp, CFP®, CPA, AIF®, offers guidance on organizing your finances. He covers managing debt, avoiding missed deadlines, and reviewing your investment strategy so you can gain actionable insights to improve your overall financial health and planning.
Outline
- 00:00 Intro
- 00:18 Personal Finance Goals
- 2:32 Creating a Budget
- 4:48 Review and Manage Debt
- 5:40 Taxes and Tax Diversification
- 12:52 Q&A
- If your investments are performing well but could pay off your home mortgage with some of those funds. What would you recommend?
- 13:52 Portfolio Revamp
- 15:17 Are you Maxing the Match?
- 19:15 Investing Basics
- 27:56 Q&A
- My wife will be inheriting a traditional IRA annuity from her father, can that be moved to a Roth IRA easily?
- Can you explain the different types of bonds? What’re the best bonds?
- Are you concerned that Social Security might change the age we receive it?
- 32:50 Focus on what you can control
- 43:53 Establishing an Estate Plan
- 35:42 Q&A
- I’ll be receiving a cash inheritance hoping to pass this to my children in the future, where do I put this?
- I have governmental Roth 457(b) from a former employer but thinking about rolling it to a Roth IRA. Does this idea make sense?
- What do you think about digital financial advisers?
Transcript
Kathryn: Thank you for joining us to this webinar on Getting Your Finances in Shape with Senior Financial Advisor, Bill Hodapp. Bill, how you doing?
Bill: I’m doing well, Kathryn. Thank you and good afternoon.
Kathryn: Good afternoon.
Bill: Good. We ready to rock and roll?
Kathryn: Yes, get to it. And then I’ll interrupt you when I have questions.
Bill: Well, welcome everyone again. Something I heard the other day that I thought was quite interesting. I think as I was walking by the TV was most new year’s resolutions are already blown by the second Friday of January. We’re almost there. Let’s see if we can get you past that with getting your finances in shape. All right. So a lot to cover today. We’ll jump right in. As we get going and just kind of thinking about the overall approach here, some of the important items, of course, you want to educate yourself. You’re here today. You’re doing that. You want to look at setting not only short-term goals, but long-term goals as well. Budget and tracking your spending is going to be important. We’re definitely going to spend some time with that. We’ll talk about saving towards your goals, taking advantage of employer sponsored plans. Retirement accounts, investing wisely, and of course understanding risks. A little bit of bonus too, we’ll spend a, a couple minutes as time allows on estate planning. Thinking about your personal financial goals, of course, those look differently depending on what stage of life you’re in. So commonly in your 20s, 30s and 40s, you might be thinking about paying off student loans, getting established in your new career, possibly buying a home or even starting a family. And then as you get into your 40s and 50s, if you have children, likely there’s a big focus on raising your children, possibly even paying for college. And then during these years, we start to think about estate planning, that becomes more important and insurance coverages, right? For those of you that are the earners for your family, you’re gonna want to make sure you have appropriate insurance coverages as well. But then as you start to shift into your 60s and beyond, really retirement becomes the focal point. It’s time to reap the rewards of all the hard work that you’ve done and really generating that retirement income paycheck becomes a focus. So you want to look at your goals again, your time horizon and, start to bring this all together. And that really leads us to the beginning of our discussion and it’s starts with creating a budget. Now, my wife’s in the industry and we actually do this every year. She starts with a budget. I help with a tax projection. We’ll talk about a couple other important things we do as we go along here. But, when you think about a budget, there’s some main points that you want to look at. And those are what’s coming in, that’s your income. What’s going out, that’s your expenses. And see what you have left at the end of the day. The other thing is you want to plan to save, right? If saving becomes an afterthought, it often doesn’t happen. So you want to build that into your budget process. Include a monthly savings goal in there. And so here’s an example. Someone with $8000 of income, they’re going to have a goal of saving, hopefully, and we say a general rule of thumb 20% that can cover both what you’re putting into your retirement plan as well as creating an emergency fund. But here’s what I like about this slide here, is you really want to split your expenses, you’ll see on the screen, between needs and wants. When you think about it, you’re going to have one-time expenses, unplanned expenses that come up. It’s just life. Right? So if you have your expenses split between needs and wants, then what you can do is say, Oh, well, I had this one-time expense rather than sort of robbed my savings plan of 20% that I want to put to that on a monthly basis. I can adjust my wants for that month, maybe meet some or all those one-time expenses and then keep my plan on track from there. If I take a look and dive into the details, some examples here, as far as needs, well, of course, those would be like housing, food, maybe utilities. Wants would be clothing, dining out, vacation, all great examples. Again, you can adjust when my wife and I sit down at the beginning of the year, we look at all this. So not only are we looking at our budget, but we’re also looking at those needs versus wants. What are we thinking about for vacations? Are there other one-time expenses, like maybe home improvements? What do those look like, right? And then we can adjust as we go throughout the year and revisit that budget. And then again, first and foremost, make sure you put that savings at the top, pay yourself first. If it’s an afterthought, likely it’s not going to happen. So next would be reviewing and managing debt. So if you have debt, a big thing here is, you know, you want to consider, can you consolidate it, of course, at a lower interest rate, and if you can, great. But some of the things you want to focus on if you have debt are schedule out all those debt items, put the balance down, put the rate of interest down and take a look at those and say, okay, can I pay off the lower balance higher interest rate cards or items first, free up funds? And then if I have other debt, I can pay down those items. This will usually help you get things paid down faster. And then of course, any excess you can move over to savings. And then if you do have the debt, that’s something else you want to budget in, right? Of course, when you go to do your budget, you want to have a line item in there for paying down debt. As we think about taxes, very important area. There’s almost no financial decision you’re going to make that doesn’t have a tax impact, right? So when we think about taxes, there’s a few important things. The first is certainly you don’t want to miss the deadlines. If you go in your browser and you put in important tax deadlines, you’ll get different hits that will come up. Some of those will be the IRS website, a lot of good information there, preparing to file your taxes. And you click on there and you’ll see the different deadlines. Some of the common ones we think about are things like, of course, individual filing deadline on April 15th. You can extend to October 15th. Something that we see missed often, if you’re heading into retirement, is that first year of retirement. You’re used to having that W2, those withholdings. Now all of a sudden you retire. And you don’t necessarily have withholdings. Sure, you can withhold from pensions and Social Security. You have to file the appropriate W4s to do that. But where I’m getting at is you want to consider then making quarterly estimated payments. First choice would always be to have withheld from your streams of income. Again, pensions, Social Security, if you’re taking a distribution from your IRA or 401(k), try to have the withholdings come from there. If not, you’ll fall into the quarterly estimated payments. Remember, the system we have is a pay as you go system, which means if you wait to the end of the year to make a payment or when you file your taxes, you could be subject to a penalty. The estimated payment deadlines would be April 15th, June 15th, September 15th, and then January 15th of the following year. So you want to be cognizant of those and really plan ahead. Are you going to have withholdings in retirement from some of the sources I mentioned? Or do you need to make those quarterly estimated payments? As we continue to build on taxes, this is perhaps one of the most important slides on here. We like to say here at Pure that taxes can take away as much or more than the market can. How you save while you’re working dictates in large part how you’ll be taxed when you’re retired. Okay. So when we think of taxes, think of 3 pools of money on how you can build and save for retirement. Top one being tax-free, think Roth IRA, you’re putting money in after tax. It’s coming out as long as you meet the rules tax-free 0%. As you go to the bottom left, that’s your taxable pool of money. And so these are after tax deposits and they’re taxed two different ways. If it’s a bank account, it’s interest income, ordinary interest, that’s taxed at ordinary rates. Those are the highest rates. But if you’re buying securities or ETFs or mutual funds in this pool of money and you sell them, well, how your taxed depends on how long you own the investment. If you own it more than a year and you sell it at a gain, you’ll get the preferential long term capital gains rates, at least for federal. Those could range 0 to 20%. If your income is over a certain level, there’s an additional 3.8%. But if you own a security and sell it at a gain and you have it less than a year, you don’t qualify for those special rates. And then you’re treated as having ordinary income and taxed at the highest rates. Again, ordinary income tax rates. The last pool of money in the bottom right, would be tax-deferred. So here you want to think IRAs, 401(k)s, 403(b)s, SEPs, simples and the like. These are the savings vehicles where you got essentially a deduction. It was a pre-tax deposit up front, which is great. It’s growing tax-deferred. The problem is when you go to take it out, it’s all taxed. At what rate? Ordinary income. The highest rates up here on the screen, 10% to 37%. And so when you think about retirement, if you had your choice, where would you want most of your money? Well, hopefully you’re answering in the tax-free pool up top. 0% sounds pretty good to me. Where most people save is in the bottom right, the tax-deferred pool. Why? Well, I think there’s been a lot of misinformation in our industry. And so we’ve often been enticed by that upfront tax deduction. Really what you need to do is take a step back and look at your overall picture. Again, starting with budgeting. And then seeing what your annual income and expenses are and what tax bracket you’re going to hit in. But the point being that you want to really consider what bracket you’re in now. What bracket will you be at key points in the future throughout retirement? And the old adage that we’re all going to be in lower brackets in retirement just simply isn’t true. A lot of people we talk to are in a similar, sometimes even higher bracket. And so that’s where this really all comes together is understanding what tax bracket you’ll be in in the future. And then you can make important decisions like, gee, do I save to my pre-tax 401(k) or IRA? Do I save after tax to the Roth IRA or even the taxable pool there in the bottom left. And then in retirement, it’s even more important when you go to distribute this money back to yourself, when you create that retirement income paycheck, again, really important to know where your brackets are now, where they’ll be in the future. And then if you do have these 3 pools, how much do you take from the tax-deferred? How much do you take from the tax-free? How much do you take from the taxable to manage the brackets that you’re in? And then the other challenge with the bottom right is that the IRS really has a lot of control over that pool of money. You might be familiar with required minimum distributions. For most people they start at age 73 or 75 if you haven’t already started. And that’s where the IRS says, hey, we’ve given you this tax-deferred treatment for years. Now we’re going to force you to take money out of the account so that we can tax you, right?
So it’s, it’s really out of your control. If you have money in that bottom right, that tax-deferred pool, you really have to cut that back by about 25% to 33% for unpaid taxes. The other challenge is from a legacy standpoint. So if you’re thinking about, hey, I want to give money to maybe my children, the next generation, when I pass on, well, if it’s in the tax-deferred pool, they’re going to have to take the money out over 10 years, and it’s all taxed at ordinary income. Yet, if you can get money into the Roth, the tax-free pool, they’ll still have to take it out over 10 years, but they won’t pay taxes. So, when you’re thinking about saving, and you’re thinking about drawing funds, you want to factor in all what I discussed. A couple quick ideas on ways to get money into the Roth tax-free. If you’re working, and you’re not over certain income limits, then you can put money into the Roth directly. If not, there’s something called a Roth conversion, moving money from tax-deferred up to tax-free. Bad news is you have to pay income taxes. Good news, tax-free for the rest of your life. So it’s just a couple ideas around really controlling your taxes over time and result you’re looking for is you really want to minimize taxes, make your resources go further. Kathryn, any questions so far?
Kathryn: Jim’s asking “If you have investments that are doing pretty well, but you could pay off your home mortgage with some of those funds, what would you recommend?”
Bill: Yeah, great question, Jim. Thank you for your question. Really what we look at a high level is what rate of return are you getting on your investments and what rate of return are you paying on your mortgage? So if you were able to refinance like a lot of folks, when rates were down, you likely have a pretty low mortgage rate. And hopefully your investments are outpacing that, in which case it would make more sense to leave your money invested and continue to just pay that mortgage at a lower rate. On the other hand, if you’re in a situation where your mortgage rate is higher than the rate of return on your investments, then perhaps it would make sense to pay down your mortgage.
Kathryn: It sounds good. Okay. I think people are just intently listening.
Bill: Good. Let’s jump back in here. And so really, we want to talk next about, your portfolio. Of course, that’s a key component to everything that you’re doing. So a couple ideas here, you want to view your portfolio holistically, monitor your investments in one place is a lot easier. And so it’s not uncommon that I’ll meet with folks and they’ll have investments in, oh, 10 or more different accounts, and it could be 3 to 5 or more different financial institutions, and it starts to be really challenging to manage that, especially as you get into retirement and you start to think about taking distributions. Often, consolidation can help lower administrative fees. When it comes to tax time, it’s just a lot easier, fewer 1099s you’re getting, a lot easier to prepare your income taxes. And then also, just as far as distributing funds, the fewer financial institutions, the fewer accounts you have, it’s going to be a lot easier when you think back on that previous slide with the tax triangle, trying to pull money from different accounts, different account types to control the taxes you’re paying, a lot easier with fewer accounts. One key to success here is if you are working and you’re putting money in your company retirement plan is make sure that you’re maximizing that match. Recent study done here that said 59% are above the match rate, 17% are at the match rate and 23% are below. You’re really leaving free money on the table here. So make sure that you’re matching, you’re putting enough contribution in your company retirement plan to get that match. We’ll take a look at an example here. So starting balance is zero, annual salary of $80,000. Rate of return of 6% and contribution period is 20 years. So you can see on the left, someone that’s putting in a 2% contribution with a 1% match ends up over 20 years with about $155,000. If that same person increases the contribution to 6%, gets now a 3% match. You can see it tripling the money, over $460,000. So make sure that you’re maximizing that match. Okay. And we wanted to talk a little bit about cash flow here. And this is kind of pulling things together when you’re talking about budgeting, maximizing the match, saving for retirement, and just kind of planning out retirement. I think you’ll find this example pretty interesting here on a few years can make a difference as well as, of course, how much you save, but we have John and Sally here. They’re both age 57. John’s salary is $150,000. Sally’s is $125,000. Joint 401(k) savings so far is $1,000,000. They’re saving $50,000 a year. They’re planning on spending $112,000 in retirement, about 80% of what they’re spending now, which seems pretty reasonable. Rate of return is 6% and inflation is 3%. Well, if they work another 5 years and they retire at age 57, you can see on the graph here, their projection is their money will last until 82. And, you know, if you’re comfortable with that, that’s okay. But if you say to yourself, well, you know, I want my funds to last longer than that. What can I do? Here’s a couple ideas. If you work just 3 years longer, so now you’re retiring at 65. And now, yes, you’re jumping up your contributions. In the last example, they were saving $5000 each per year. Now they’re saving $30,000. So obviously it’s quite a bit more, but by delaying Social Security, from 62 to 65, in our previous example at 62, they were getting $25,000 each. Of course, as you draw your Social Security before full retirement age, you’re gonna take a cut and pay if you will. There’s a discount there. It’s about 5% to 6% as a rule of thumb. So now you work to age 65, less of a discount on your Social Security. In our example here, they get $36,000 each per year instead of $25,000. That’s the rest of your life. And so when we feed this all in, now what we get is money lasting until age 94. So again, quite a bit of a difference. So as you’re planning for retirement, it’s not coming out quite how you want. You start tweaking things. Do you work a little bit longer? Spend less? Save a little bit more? You’ll be surprised how you start putting a few things together and the impact it can have on your retirement. Just a little example of compounding money here for investment growth. Here we have an example starting with $38,000, rate of return 6%, investment period 30 years and ending up with over $218,000. I think we’re all pretty aware of this. The earlier you save, of course, the better. And now let’s jump over to investments and really just kind of touch on some basics here and some key points is that first of all, you want to develop a clear understanding of your goals, your time horizon, and your risk tolerance. And just when you think about it, and I have folks ask me about this all the time, you know, it’s one thing if you have a short-term goal, that’s maybe one, two, 3 years away versus a long-term goal, 10, 20, 30 years away. Where you put your money is going to probably be dramatically different in those two examples. If you’re short-term goal’s 1, 2, 3 years away, maybe even up to 5, you’re likely going to be conservative to maybe even ultra-conservative, whether it’s, you know, a savings account, a money market, treasury bills, something of that nature versus now, when you think more of long term savings towards a retirement goal, well, that’s when you more think stocks and bonds. And we’ll talk about those. But again, those are going to look a lot different. So if you really can’t afford to take risk, I get questions like, gee, Bill, I’ve sold my home. I’m going to rent for a short period of time and look to get back in the housing market in the next couple of years or so. Well, that’s probably money that you want to consider being very safe, secure with versus money that you’re saving long term for retirement. Some of the investment choices and kind of major asset classes, if you will, would be stocks, bonds, cash alternatives. We’ll talk about asset allocation, which is extremely important as well. As far as cash alternatives, it’s what you would commonly think of. So high yield savings accounts, CDs, money markets, mutual fund money markets. As we think about bonds, just kind of cover again the basics here. Bonds are really making a loan to a government entity or a corporation. So, you’re kind of playing the bank here. You buy a bond. You’ve essentially lent money. You’re going to receive interest payments back. And then at the end of the bond term, at maturity, you’ll receive a principal back. There are a few risks with the bonds, although we generally think of them as being pretty secure. The longer typically you go out on a bond maturity, the higher the risk it is. Interest rates could change more over the long term than they likely would in the short term. And at the same time, when you’re thinking about bonds, you want to think about the quality of the company that you’re buying or the government organization, right? If you think about buying bonds of Walmart. Well, that’s a pretty established mature company that would likely be a lot more secure than a startup company. The startup company will pay you a higher interest rate because there’s more risk associated with it. So you just want to factor in length of maturity and a credit rating as far as when you’re buying those bonds. When you think about stocks, if bonds represent loaning money to a corporation, stocks really represent owning a piece of a corporation. And so just like bonds, they carry risk, of course, more risk than bonds do. But when you think about the risk with stocks. You want to think about maybe larger, more mature companies and smaller companies, whether there be startup or emerging growth, as they become large, large capital or large companies. And so, typically speaking, those larger companies are going to have less risk. They’re established. They’ve been going a long time. Small companies not around as long. They’re going to have more risk with them. And so you want to be able to mix those together in your portfolio. When we think about different types of stocks, really two main types would be common stocks and preferred stocks. So, either case, you own part of the corporation, and you could receive dividends. Preferred stocks receive priority when getting the company dividend. Typically, the preferreds don’t have voting rights. So again, you just want to factor that into your investment decision. As we think about some of the keys to success over the long-term in the market, the first one that comes to mind is avoiding market timing. So regarding that, we have a nice chart up here on the screen. When we look over the 20 years ended 2020, the S&P index averaged 7.5% a year during that time frame. I know it seems hard to believe, but if you miss just the 10 top days, your return would have been cut more than half, 3.4%. You missed the 20 best days. You were close to 0.1%. And in fact, if you missed the 30 best days, then you are -1.5%, 40 best days, close to 3.5%. So the idea is the stock market, again, it’s really for the long term. The longer you’re in the market, the greater the probability you have of being successful. And when we continue to think about the market, again, long term approach is really the way to success. Here, what you’ll see is a slide going back to 1950, and you can see all the lines that are above the horizontal line. That’s, of course, when the market had a positive rate of return, and then you can see the lines below negative rate of return, probably about 70% to 80% of the time returns in the market are positive. And again, you just want to be able to- we’ll talk about this. You want to be able to design a portfolio that you’re comfortable with, that you can sleep at night so you can reach both your long-term goals and your short-term goals. The idea is you don’t want to be getting in and out like we talked on the previous slide that’s likely going to damage your long-term returns. Asset allocation is important too. There are studies out there that say asset allocation is the number one determinant of your long-term portfolio returns. And so you’ll see here on the screen we’re showing the major asset classes. Stocks and bonds and cash. You could put commodities in there as well. And the idea is you want to strategically mix these together, to come up with a portfolio that will help you reach your goals. So I always like to think of a ladder here. Think about 10 steps on the ladder. You go up to step one. That would be really conservative. A portfolio of mostly bonds with very little stocks. You fall off the ladder. You don’t have far to go. It’s pretty safe. As you go up on the ladder higher, you start to take on more risk. That’s okay. You’re expecting more return. That would be more appropriate for long-term goals. And you go up even higher. You’d mostly stocks and very little bonds. The idea is looking at again your time horizon, your risk tolerance, your goals. Are they short term? Are they long term? Factoring those all in and then determining the portfolio that’s going to help you get to where you want to go. So we talked a little bit about asset allocation, but the other thing that’s important right along with that side by side would be a portfolio diversification. So think as allocation is having your money in the different pools, stocks, bonds, cash, maybe commodities or alternative investments, but then in each one of those pools or buckets, how is your money invested? Do you own one stock or one bond or do you own multiple? You really want to own multiple. You want to diversify by security issuer, region, sector, industry. That way if one company goes down, it’s not going to pull down the whole asset class. Emotions are a big part of investing. And so again, what you want to do is you want to have a portfolio that allow you to be comfortable to sleep at night so you can go through the different market cycles. And often the market goes up, we get excited, the market goes down, we get scared. The old adage, buy low, sell high is obviously what we want to achieve. People get scared, they end up selling when the market’s down and then saying, well, when the market’s doing better, I’ll have the confidence to reinvest. Well, they just did the opposite of what we want to do. So again, having that plan, following that plan upfront is going to be important to your long-term success in the market.
Kathryn: Hey, Bill, is this a good time to pause for a second?
Bill: Absolutely.
Kathryn: First, Glenn’s asking if his wife will be inheriting a traditional IRA annuity from her father, can that be moved to a Roth easily?
Bill: Yeah, great question there. You know, one of the things that could be done is it could be taken out of the annuity and just, you know, within, still within the IRA wrapper, you don’t want to cash it out, but, and, and just put it into a bank account. But you, you’d move it over to a regular IRA and then from there you can make Roth conversions. Now taking it out of the IRA, you’re gonna wanna look at a few things. You know, are there surrender fees, are there other fees involved, to do that and factor those in before you make your decision.
Kathryn: Right, okay, and then can you just explain a few of the different types of bonds, like an I bond, what are the, what are the best bonds, is there a difference between I bonds and EE bonds, etc.
Bill: Yeah.
Kathryn: I know you can’t cover all that, but a little nutshell.
Bill: Sure. Absolutely. Kathryn. Yeah, there’s different types of bonds out there, as you mentioned, I bonds, EE bonds. Those are government bonds. And so when you think about bonds, first fork in the road, if you will, is government bonds versus corporate bonds. Right? And so, either way, you’re going to want to look at, what’s the maturity? You know, is it a short term out to a few years, intermediate term, longer term? That applies to government and corporate bonds. You’re gonna want to look at the credit quality of the issuing agency or organization. Do they have a higher rating, a lower rating on the bonds? And then plan accordingly from there. Typically, what you want to do is mix them together. So you want to have some corporate bonds in your portfolio, some government bonds, some short term, intermediate, and some long term. Right now, interest rates have been a little bit challenging with our inverted yield curve. So typically, it’s paid off in the last couple years to be more in short term bonds. But over a normal cycle, you would want all 3 short, intermediate, and long term.
Kathryn: Okay. And then a Social Security question. Due to concerns regarding the funding of Social Security, are you concerned that Social Security in Congress, that might change the ages in which we can start to receive benefits? In other words, are you concerned that it might change so that you cannot start to receive benefits until a later age, such as 65 or later? Meaning, I guess, if they wanted, if they wanted to take it at 62, and then they decide not to, will they be not able to take it at 65?
Bill: Yeah. Yeah.
Kathryn: You got your crystal ball.
Bill: Yeah. Yeah. Open up the crystal ball here, right? You know, our, our, elected officials are, are, I think famous for kicking the can down the road. In my heart of hearts, I believe that we’ll fix this. Will it be last minute? There’s, there’s a good chance it will be, you know, and whether we increase the limit on, you know, how much we pay into Social Security on the first so much of wages that’s, of course, been going up over the last several years, you know, whether it’s a later start date, whether we come up with a means tested. I think there’s a solution there. It’s just too important of a piece. It’s hard to say what changes they could put in place. You know, could they take away, taking it early like was asked? Certainly, you know, they could. I tend to think Social Security will be around. I’ve talked to, others about this that that seem to be of the same opinion in the business. So I think it’s going to be there. And what I would do with that is really just look at your individual plan. And so, like we said, you take it early. You take a discount. Of course, if you go past 67. Go out towards 70. Then you can get that 8% per year. We tend to find when we run analysis for folks is that the break-even is easy about in your early 80s. So if you feel that you’re going to live past your early 80s, and you want to look at lifetime benefits, it probably makes sense to take it later rather than sooner. On the other hand, if you feel like maybe you’re not going to live past your early 80s, or there’s other reasons, current cashflow, that type of thing, then maybe you want to take it sooner. But I think it’ll, I think there’s a good chance it’s, it’s here for the long term, just might look a little bit different.
Kathryn: And don’t you think we also would be grandfathered in per se, like it would take a long time as it did before to actually get to a stage where it would, we would not be able to take it early or something like that? The changes.
Bill: Yeah. I think that’s a great observation, Kathryn. I think certainly there would be a good chance of that.
Kathryn: All right. We’ll get back to it. Thanks for pausing with us. So when we think about investments as far as what you wanna focus on, creating an individual investment plan that fits your risk tolerance, structure portfolios around dimensions of returns. What we mean by that is there are certain characteristics that are usually common in successful investments. Companies that have strong earnings, is certainly one of the most important that comes to mind. You want to broadly diversify, so. Yes, we know there’s the high flying investments out there that have done well, but if you’re in those and there’s a pullback, especially in retirement, that’s not going to be an envious spot. So diversifying amongst asset classes, amongst security issues, regions, industries, all that good stuff that we talked about. And of course, reducing expenses and turnover, that will help your money go further. And then minimizing taxes too, that gets into where you pull your money from and all that type of stuff. So focus on what you control is the message here. All right. Some estate planning considerations. And so things you want to think about is, do you have a plan in place for managing care? What will happen if my children pass away if you have children at home? Do you have a family member with special needs? How do I make sure that my assets will go where I want them? And when? And am I going to leave anything to charity? So those are some of the considerations. And then when we think about dying without an estate plan, definitely creates a challenge, courts get involved. We call that probate, possibly your wishes aren’t carried out. You can leave your family with a financial hardship, certainly unpaid necessary- unnecessary taxes and expenses. When we think about some of the basic estate planning documents, before we get there, what you want to do is create an inventory of your assets. And we’re actually going to talk about this here in a moment, that ties into the budgeting. Where do you go next from here, but, creating an inventory of assets. Accounting for needs of your family and then some of the basic state planning documents that you want to consider would be wills, a trust, advanced health care directive, durable power of attorney for financial matters. You want to review your beneficiary designations and you should do that periodically anyway. So if you look at your retirement accounts, your 401(k)s, IRAs, etc. Take a look at your beneficiary designations. Make sure you have them. Make sure they’re up to date. And then, of course, you want to prepare for income taxes. And I think before we get to questions, something that comes to mind for me, as I said at the beginning, my wife and I do this every year, So, you know, and some of the things we talked about is really the starting point. But where do you go next from here? So if you go back towards the beginning to budgeting, of course, that’s for the current year. But what you really want to be able to do is do that year by year all the way through the end of life. Why? Then you can identify the years you might have a surplus. You can save more. Where do you have a deficit? Which means you’re going to have to draw money maybe from your savings. Where do you take it from? You also want to map out in your expenses what your taxes will be. Remember we said, it’s super important to know what bracket you’re in now, what bracket you’re going to be in in the future. And at key different points, what did taxes look like when you retire? What did they look like when you take Social Security? What do they look like when required minimum distribution start? And this will allow you to really put together a strategy to minimize taxes over your lifetime to then make your resources go further. And just like you’re projecting or mapping out your income and expenses, you want to do the same on your net worth. So when you think about net worth assets, liabilities, of course that gives you your net worth assets typically would be bank accounts, retirement accounts, other investment accounts, your home. Liabilities, mortgage, car loan, credit card, if you have it. And so by taking at least your investment part of that net worth statement, factoring in what you’re going to add each year, company match, assume a growth rate that you think is reasonable, you can start to project out what your assets might look over time. Once you have that projected, assets or investments, as well as projected cash flow or income statement, then you again can really start to pull things together and map out a plan. So that’s bringing this all together, taking a look at the future, really end of the day, determining whether or not you’re on track.
Kathryn: Thank you, Bill. There do have a few detailed questions, so, you may not be able to completely get into, and I did just put in the chat that if we can’t get to your specific question because we can’t really, you know, we don’t know all your details, please give us a call or click the link that I just put in there to schedule a complimentary, no cost, just a consultation with someone so that you can get your personal questions answered. So, two questions and we’ll see how much you can get into here. Okay, so “I’m 60 years old and will be receiving a cash inheritance this year, pending sales of the assets. I would like to place the inheritance in a revocable trust with the plan to eventually pass this on to my adult children within the next 5 to 10 years. Where is a good place to invest and grow the inheritance as well as to minimize the taxes as the investment transitions to my children?”
Bill: Yeah, great question. So there’s a couple things there too that are important. You want to take a look at those assets that you’re getting. And see what the basis is in those to determine the tax consequences. But from there, really is, unfortunately, you can’t just dump a bunch of, a bunch of money into the Roth, or into the tax-deferred pool. So if you think back of that bottom left, that’s your taxable pool of money. And so that’s likely where the pool that you would invest in. And so there’s some considerations there. Certainly any ordinary income that you generate, interest, ordinary dividends, those are taxed at the highest rates. So if you’re thinking about growing the assets for a future generation, you might want to think about putting together a portfolio of stocks or stock funds. And some bond or bond funds. And then ideally, if you can hold that over the long term, or at least have those more than a year, and you sell them at a gain, you’re going to get that lower capital gains rate. And of course, you’re going to want to look closely at the risk tolerance. Will you need that any of that money short term, long term? Is it all for the next generation? And then you can put together an appropriate portfolio from there.
Kathryn: Sounds good. All right, so “I have a question about the governmental Roth 457(b). I have some funds and one from a former employer, but I’m thinking about rolling it into a Roth IRA as the Roth 457(b) does not have the same tax benefits as the traditional. Assuming there is no change to the withdrawal treatment, does this idea make sense?
Bill: Yeah, and those are something I don’t run against as much and I’d have to double check. I think you would go to an IRA first, but then yes, you can go to a Roth from there. Again, whenever you’re converting to a Roth, there’s some things that are really important that you want to look at is first of all, what, what tax bracket are you in? So we think, you know, it starts at 10%, it goes to 37%. What’s your bracket in your base situation? If you convert, how much do you convert? So we think of tax brackets, we think of stair steps, and then so you want to determine, well, how much is appropriate? So it doesn’t put you in too high of a tax bracket.
Kathryn: It sounds like it was in a government Roth 457.
Bill: Ah.
Kathryn: So he was just wanting to roll it into a Roth IRA.
Bill: Okay.
Kathryn: Okay. Another question. “I am 65 and a half and I will be waiting until my full retirement age to begin Social Security. Would it be worth it to hold on, hold off on making my Social Security- taking my Social Security and starting withdrawing that difference from my 401(k) to get the extra Social Security payment a couple of years down the road?” meaning after he’s 65 and going on to, after 67 going on to 70. “I know this is a length, lengthy. Basically, it is. “Is it a good idea to hold off on Social Security and pull from my 401(k) for a couple of years?”
Bill: Potentially, yes. It really depends on your individual situation. So when we were talking about here at the end, as far as mapping out your future cash flow, what’s coming in, what’s going out, including taxes, then you can start to run a couple different scenarios. What does it look like if you delay Social Security and go for that higher benefit, pull from your 401(k), or as you said, you know, of course you could do the opposite, and start those Social Security benefits earlier. It’s really individual dependent, so you really have to map out those two courses of action and see which one makes sense.
Kathryn: Gotcha. And then lastly, “If we don’t have a huge estate, do we need to worry about the estate tax? Isn’t it 40%?”
Bill: Ah, it’s big. Correct. And the current exemption this year is closing in on just about $14,000,000 per person. So if that’s not you, you’re okay. Now it’s scheduled to sunset at the end of 2025 going into the beginning of 2026, we’ll revert back to the old laws. There’s probably going to be an inflationary factor on there. Some of the numbers I’ve heard is maybe somewhere in the neighborhood of $4,000,000 to $6,000,000 per person. So certainly laws can change, but if you’re not above those limits, you’re okay at this time.
Kathryn: Sounds good. And then lastly, someone was just asking about what you talked about before. Oh, “Not sure if I can ask, but is it recommended to have your investment managed by digital advisors? What do you think about digital advisors?”
Bill: Yeah, I mean, certainly that can be a way to go. It may be a low cost solution. I think any time you’re hiring a professional, it really comes down to value. What are you paying? And what are you getting? And so if all you’re after is investment advice, that could certainly be a solution. But I would say as far as Increasing your chances of success, you might want to consider not only getting help with investments if you need it, but also taking a look at putting together a financial plan as well as a tax planning, and it’s only the 3 of those that will have help enhance your probability of success.
Kathryn: Well, thank you everyone. If you have any questions, please feel free to give us a call. Check out our website. And Bill, thank you so much for all of your information. We hope that everyone has a really great 2025.
Bill: Thank you, Kathryn.
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