Nothing like a world-wide pandemic to get you ready for a Financial Fresh Start in the new calendar year. While 2020, certainly came with challenges, it also highlighted how important having a plan in place is for your sense of security now and into the future. Financial professionals Joe Anderson and Alan Clopine provide the tools to empower you to make a fresh start with your goals, savings accounts as well as your emergency and retirement funds starting today. From fine-tuning your portfolio to minimizing your tax exposure, you’ll learn how to get your finances back on track for 2021.
Important Points:
(01:13) – Financial Stress
(01:50) – Financial Fresh Start
- Re-Access Your Goals
- Get Your Financial House In Order
- Selecting and Fine-Tuning your Investments
- Minimize Your Tax Exposure
(03:36) – Common Financial Goals
(04:48) – Getting Your Financial House In Order
(06:00) – Savings Goal by Category Example
(06:44) – Automate Your Savings Goals
(08:45) – How Much You Can Contribute to an IRA and 401(k) in 2021
(11:12) – Top of the 12% Tax Bracket for 2021
(13:03) – Investing Your Retirement Accounts
(16:40) – Common Investor Mistakes
(20:10) – Tax Strategies for 2021
(24:07) – Ask the Experts
(25:17) – Pure Takeaway: Getting a Financial Fresh Start
- Revisit and Update Your Financial Goals
- Get Your Financial House In Order
- Investments Tailored to Your Goals
- Strategies to Reduce Income Taxes
Transcript
Joe: Well, 2020 is over, thank goodness. Welcome. 2021 and welcome to episode 1, season 7, we are excited to get a fresh start on our finances. Last year was pretty miserable for a lot of different people, but today we’re going to start fresh with your overall finances. Welcome everyone. The show is called your money your wealth. Of course. My name is Joe Anderson. I’m president of Pure Financial Advisors. In the show, of course, is not the show without the big man. There’s Big Al Clopine sitting right there. Big Al. Season 7, buddy.
Al: I can’t wait to figure out how to get a fresh start. Let’s move on to 2021.
Joe: When you look at what you need to do like New Year’s resolutions, number one on the list is probably lose weight. Quit smoking, right? But get your finances in order. Get your financial house in order is always usually in the top five, so let’s get started with that today. That’s today’s financial focus. Let’s take a look at a few stats here. 88% of us are a little bit worried or stressful about our finances. And of course, this makes sense because people lost their jobs, they got furloughed, they got, you know, reduced wages. All sorts of different things have happened.
And if that’s not a wake up call to really take a look at your overall finances to make sure that no matter what happens in your life, you’re still going to be OK. And to reduce that stress level, because when the stress level goes up, guess what? We make really bad decisions. So let’s bring in really good decisions and let’s bring in the big man. He’s smarter than all of us.
Al: Financial fresh start. So let’s start the year, right? A lot of us want to kind of move on to 2021. So the first thing to do is kind of reassess our goals. So what are we trying to accomplish and we’ll kind of give you some examples of maybe what to think about? And then once we know what we’re trying to accomplish, let’s put our financial house in order. When we’ve done that, let’s figure out what investments are going to make sense and how to fine tune them, how to maintain them, to achieve our goals. And finally, let’s not forget about income taxes because income taxes are high and they may go higher. We’ll have to see, but there are strategies that you can put in place to reduce your taxes. So Joe, I think it’s it’s the right time to be talking about a fresh start because people are excited about a new year. 2020 was tough for a lot of folks. 2021, there’s still going to be a lot of hardships, but hopefully we’re going to move through this.
Joe: And once every year there’s hardships, right? 2020 was a little extraordinary. But each year things kind of come into play, and it’s really good analogy here when you’re looking at putting your financial house in order. Right? Because the first step is to identify your goals, what are you trying to accomplish? So that’s the blueprint, right? You have to get the architect in to build your house. You’re not just going to start with your pool and then work backwards, right? You have the game plan laid out. Then you can start building the foundation and then you can fine tune it by putting in all the different trinkets that you like and then make it really nice and protect it, you know, the security systems and all of that. So starting with your goals is always number one. So it’s figuring out, first of all, what are your goals? I mean, sometimes people need help just to define their overall goals because, you know, they really don’t know where to start.
Al: Yeah, I think that’s right. And I think, you know, the goals don’t have to be that complicated. I mean, actually fairly simple. What are goals? What are what are things people think about when they think about finances? Well, maybe I want more emergency fund. Maybe I don’t have enough in emergency fund. And this was one of the common things that came up during during the 2020 year paying off debt is important for a lot of you. Buying a home is a goal putting kids through college. And of course, we all should be thinking about retirement saving for retirement. And what makes this tricky, Joe, is it’s it’s not just one thing. It’s often many goals, all at one time.
Joe: Right? I would imagine a lot of our viewers have every single one of these goals on their bucket list. Maybe it’s not their house, maybe it’s their kid’s house that they want to help with a down payment. Maybe it’s not your children anymore because they’re already done with school, but you have grandchildren, you know, like, Oh my gosh, how are they going to even pay for school or maybe schools free by then, but you have to at least start jotting them down because I think we think of this stuff all the time, right? It might keep us up at night, but as soon as you start writing things down and formulating an overall strategy, it becomes a lot easier.
Al: Yeah, there’s no question. I think writing it down is the key because because otherwise it’s just, you know, kind of in your mind and then you forget about it. So let’s talk about what are these goals are saving, right? So how do you save more money? Well, it’s actually not really that complicated, but just for a little review. You increase your income, you reduce your spending so easier said than done. But as you get raises, as you get bonuses, make sure you save some of that. Maybe try to increase your income, improve your professionalism at work so you can get more money, maybe have a side job, maybe look at what you could cut and spending. Maybe you refinance your home if your interest rates are high. So, Joe, these are ways that people can actually then save a little bit more.
Joe: Right. And I think you look at your goals and say, Hey, I want to make sure that I have a secure retirement. We need a boost up our savings a little bit. You know what, our consumer debt, when a little bit high over the last couple of years. Maybe you just start with those three. All right. Then you start formulating, All right. Well, how much discretionary income do you have that you can start throwing at these goals? Right? You don’t want to just do one at a time because we find that that could be disastrous. So you want to split it up and say, OK, I need to throw a little bit of money in my savings account just to build that cash reserve, maybe throw another couple of hundred dollars right on the debt. But making sure that I don’t forgo my overall long term goals. So here’s a quick example, right? So let’s say you have an emergency fund that you want to continue to build. You’ve got to pay off some debt and of course, your retirement savings. And maybe 750 is what you found by doing the exercise that Al just said, hey, maybe you got a bonus or a raise this year, right? Or maybe you really tighten up your spending. Maybe you could refinance your house to find some discretionary. There’s all sorts of different ways, but let’s say you found that extra $750 now you split it up into the different categories into the different goals. Right. And just make sure that you hold yourself accountable because you know, we’re reaching the goal. And then all of a sudden something comes up in the goals derail or you or your plan derails.
Al: That happens all the time, Joe. And so to really make this effective is you need to automate it. And so to automate it, it’s like, Well, what do you what are you trying to? Do what’s your goal, what are you saving for and then say, if you can’t automate that, like, for example, an emergency fund, you’d want to have a separate savings account, maybe you actually do an auto withdrawal each month from your checking to your savings. So it just happens without you thinking about it. Same idea for paying off debt. Maybe have an auto payment. Maybe it just comes right out of your online bank account and then finally, your retirement. If you got a 401(k), that’s great. That’s automatic comes out of your paycheck. If you don’t, then maybe you do an auto withdrawal on your Roth IRA. Your regular IRA make this out of sight, out of mind, Joe, because what happens is people don’t do this. They end up spending and trying to save what’s left over and very little saved.
Joe: I mean, we see this every week. It’s like you had to pay yourself first to the most important person in the own right. It’s you. So you’ve got to make sure that you take care of that person first. I know it’s like, Oh no, I’ve got to pay the power bill because if we don’t have power, we can’t eat. Yes, I get it. But if you save for your retirement, if it’s on a sight out of mind, you know what? You’ll be able to figure out how to spend that net paycheck for most of us. Of course, you know, there’s some that just can’t do it. But if you look at it like this and just say, Hey, I’m the most important person, I need to make sure that I take care of my future self. And then you can figure out if it’s out of sight, out of mind. You will learn how to basically live within those means. And then looking at 401(k) contributions as well, that’s really easy. Go to the match comes directly from your paycheck, but paying off credit cards and debt in cash is a little bit different story just because you’re going to have to set up those auto withdrawals.
Al: Exactly. And and I think that’s that’s one of our most important points is do these all at one time? So in other words, say here’s what a lot of people do is they just focus on one thing and then they wake up 10, 20 years later, they got nothing in their retirement account and you missed all these match dollars. So for those of you that can save a little bit more in your retirement account, here’s the current limits, right? So a Roth IRA, regular IRA. So it’s $6000. If you’re over 50, you get a thousand dollar catch up, so it’s $7000 for a 401(k). 19,500 is the maximum. If you’re over 50, then you can do another 6,500 to get up to 26,000. So this these are great things to work towards. You may not get there overnight, but you want to gradually work towards them and Joe as people save a little bit more, you know, you just get used to it. And then and then pretty soon this your savings grows and you’re in a much better spot
Joe: And people get excited, right? You know, as soon as you start working out, you know you got on the diet and you lose three pounds, you’re like, This is awful. I’m not going to do it because it doesn’t work. But then all of a sudden you do it for another couple of weeks and then you start shed the pounds and you can see it. The same thing goes with savings and money as soon as you start seeing that, compounding the fact you get a little bit more exciting to get a little bit more motivated to take action. I want you to take action right now. Go to our website, yourmoneyyourwealth.com, click on the retirement readiness guide. That’s our special offer to you this week, it’s updated with 2021 numbers. It’s our retirement readiness guide. Get ready for retirement with our guide.
Go to yourmoneyyourwealth.com. We’re going to take a break. We’ll be back in just a second. Show’s called Your Money, Your Wealth.
Joe: Hey. Welcome back to the show, show’s called Your Money, Your Wealth, Joe Anderson and Big Al Culpine hanging out here talking about getting ready for retirement and getting a fresh start. Right, it’s a new year. Let’s make sure you start off the year appropriately. Go to yourmoneyyourwealth.com click on our special offer. This week it’s our retirement readiness guide, all updated for 2021. So go there yourmoneyyourwealth.com Let’s see how you guys did on the true false question.
Al: I should contribute to Roth IRA and or Roth 401K when my federal marginal bracket is either 10% or 12%, and I would say that would genuinely be true, in fact, almost in all cases. And Joe this is because you’re going to have to pay taxes on your IRA, your 401k when you pull the money out. If you can intentionally pull it out when you’re in a low bracket right and do a conversion, then why not pay that tax? While it’s in the low bracket, right?
Joe: I guess every person’s situation is a little bit different, of course, depending on what your income is, depending on one of your assets, depending on what your goals are. But just to kind of give you a heads up of what we’re talking about in the 10 or 12% tax bracket. So as we’re getting things prepared for our taxes, maybe the W-2s are coming in and you’re getting your tax docks together in your planning for 2021 or this year of saying he should take advantage of that Roth 401(k) or maybe the Roth IRA? Well, in this really simple example, if we’re saying, hey, if you’re in the 10 or 12% tax bracket, that’s almost free, right? It’s dirt cheap compared to where tax rates, I believe, are going to go. So if you’re single, if your taxable income’s around $40,000 right, you’re in that 12% bracket. If you’re married, it’s $81,000. This is taxable income. It’s not gross income, I would argue Al, that it probably even makes sense for a lot of our viewers to do a Roth or to convert to the top of the 22% tax bracket, which is double these numbers. Yeah, I would agree with that, Joe, because when you think about it, it depends upon your situation. Those of you that have high pensions or maybe a lot of money already saved in retirement accounts, are you just going to have higher taxable income because you’ve got a business or real estate or whatever, you may want to continue to put money into a Roth 401k, even in it when you’re in a higher tax bracket, even can convert. And now that 24% bracket Joe, that goes up to a pretty high level for married, it’s it’s about 330,000 almost a taxable income
Joe: 350,000. Yeah, in those brackets are changing, right? We have a new president. There’s an agenda coming out in regards to tax reform. We’ve talked a little bit about it, but once we get a little bit more down, then we’ll share that information with you. But as you’re getting a fresh start now, you have to take a look at A) what are your goals, which we talked about, right? And making sure that you map that out, because how can you invest your money without knowing what the money should do? So as we dive into investing your overall retirement accounts or investment accounts, it’s just looking at really simple things is like when is the money needed? What is the money for and when is it needed? That can help you really devise an overall strategy when it comes to how much money you have in stocks versus bonds, right? Bonds are saved. Stocks are a little bit more risky, right? So if you have an on all bond portfolio but you don’t need the money for 20 years, that might be a little bit too conservative and you’re missing out some of the rate of return. So it’s just kind of looking at things, writing things down and saying, Hey, what should we be doing this year? Are we a little bit closer to retirement? Or maybe retirement got pushed up 3-5 years?
Al: Yeah, I think so, Joe. And it’s also depends upon how you react to the market if you know you’re the type of person. If the market goes down a little bit, you can’t sleep at night, then you want to have a more conservative portfolio. But really, Joe, as you said, one of the keys is how long you have to invest the money. If you want to invest in, let’s say, a home, you want a down payment for a home and you need that money. Let’s say within a couple of years, three years, you probably don’t want to invest that you don’t want to invest your emergency fund that should be in cash.
We’re talking about money that’s probably not going to be used for five years or more. Then you’ve got the ability to invest and take a little bit more risk. It will be more volatile. But chances are you’ll be in a better spot by doing the stocks.
Joe: But I think there’s two sides to this right there. There’s an expected rate of return that you need to generate to accomplish your goals. But then there’s also a risk tolerance that you have in regards to your emotions. So you have to kind of battle, you know, the two sides of your brain because, hey, I need to get a 6% rate of return on my money for me to accomplish my retirement goal. Well, if I need 6%, that means I have to have stocks in the overall portfolio. But if you look at a portfolio that goes down and then you pull out every time you see that thing go down and then that market goes back up and then you invest back in, you’re not going to achieve a 6% rate of return. So it doesn’t even matter what your allocation is, you’re still going to underperform significantly. So first off, you have to see, well, what target rate of return do you need to generate and are you comfortable with the volatility that that portfolio will do once you start constructing it? Then you can kind of start tweaking things a little bit when you get into the details. It’s just make sure that you control what you can’t control. You want to control your costs. Keep them down. Keep them low, right? There’s all sorts of exotic investments out there and Al with our experience. They’re very expensive and they underperform. So why even though there?
Al: Yeah, I think that’s right. I think you’re absolutely right. You figure out what rate of return that you need and then you design a portfolio to be able to achieve that. The safest portfolio possible to be able to achieve that rate of return that you need. Make sure you diversify globally, diversify. You have international as well as domestic. Rebalance your portfolio because stocks will outperform bonds over time and you’ll end up with two risky of a portfolio. Bring that back to where the balance should be, and then make sure you tax last harvest. If it’s a non retirement account and the asset goes down in value, you want to sell it purposely to take a loss by something similar. You’ll get that market appreciation when it comes back.
Joe: Right and it just goes back to the beginning of the show. Start with your goals in mind, right? Then you’re starting to build your financial house. Make sure that you have some cash reserves, right? Then you’re like, All right, well, here’s my overall goals. Here’s the money that I’m going to pursue those goals. Then you create your overall portfolio and keep it as simple as possible. Save on costs, save on tax, make sure you’re globally diversified and then just put it on autopilot, right? Super easy. Guess what? Who does it? Not many people, because there’s huge mistakes that we all make in regards to our money, right? Here’s the biggest one that we’ve seen over the past just 12 months is that people got out in the pandemic right in March. It’s like, Oh my gosh, this is going to be Armageddon. I’m taking my money and I’m burying it in my backyard, right? And guess what? They missed one of the biggest bull runs. Let’s say someone who had a million dollar portfolio. Now they’re down to $750,000. They pull out of the market and then they’re still sitting in cash in their portfolio would be probably today 1.5, right? Something like that. Of course, hypothetically. So they didn’t lose 250,000. They lost almost 700,000 right because they waited too long to get back in or they got out. Or there’s always something that goes on to end to get in our way to start saving.
Al: And I think it’s, yeah, it’s the motions we buy and sell with our emotions we tend to buy when when markets are up, meaning we buy high, we sell when we’re fearful, when markets are low, we pay too much attention to the news. We try to time the market. These are not good things because when you do invest with your emotions, you often make a mistake.
Joe: Without question. Your emotions in your investment strategy should be in separate rooms. OK. Just put them in separate rooms, sleeping in different bedrooms there. All right. Making sure the right we talked about this not having the right stock bond allocation. You’re retiring in two years and you still have a portfolio like a 35 year old. Now you want to make sure that you have the safety in place to create the income that you need, making sure that you have enough diversification. Hey, I just want Netflix and Tesla, right? Or Bitcoin? How about the guy that lost like $200 million in bitcoin because he forgot his password? So get ready for retirement, folks. You can get ready with our retirement readiness guide go to yourmoneyyourwealth.com. Click on our special offer this week. It’s all updated for this year 2021. The Retirement Readiness Guide. That’s our special offer. Go to our website. yourmoneyyourwealth.com. We’re going to take another break. We’ll be back in just a second.
Joe: Hey, welcome back to the show, show’s called Your Money Your Wealthl, Joe Anderson and Alan Culpine answering my questions. Talking about retirement, fresh start. All sorts of good stuff today before we finish the show here. Go to our website, yourmoneyyourwealth.com. Click on our special offer. That’s our retirement. Writing this guide. Updated for 2021. yourmoneyyourwealth.com. Let’s see how you did on the true false question, folks.
Al: My employer shut down our office for most of 2020. So can I deduct all of the expenses for my home office since I spent most of the year working from home? Well, you cannot, unfortunately. So that’s false. And so let me explain. So in 2018, our tax law changed. Miscellaneous itemized deductions where’s where you would normally take that deduction is no longer available. So you can’t do that anymore. You still can do Home Office if you’re self-employed. Joe, there is an exception. You can take a Home Office deduction, miscellaneous itemized deductions in California, but it’s very hard for an employee to qualify. So I would say in most cases, don’t even try.
Joe: So with everyone working from home via COVID, it didn’t do a tax break that. Let’s dive into taxes. What are some of the things that you should be looking at for 2021, as well as some still things that you could potentially do for your 2020 tax returns? You can still contribute to retirement accounts, IRAS, Sep, IRAs, simple IRAs, things like that if you’re self-employed, so you want to absolutely make sure that you’re fully funded there. If you look at gifting right now, we’ll see what happens with gifting and estate planning with Biden’s. There’s some shake up potentially going on there, so you want to if you’re you’re looking at giving larger gifts, maybe now’s the time to do that this year.
Al: Well, it’s a good point, and we don’t really know what’s going to happen. It was just part of the that his Biden’s discussion during the campaign trail of changing estate taxes, lowering the exemptions, maybe even having a no step up in basis which that one, in my opinion, probably won’t pass. But anyway, so if you’ve got a large estate, you might want to start looking at some estate planning techniques. Some other things Joe is giving to charity gift appreciated assets to charity. This still works. This is not new, but it’s still a great strategy if you want to give to charity. Of course, you can take out your checkbook, you can write a check and give it to charity. But if you take an asset like a stock or bond mutual fund that’s gone up in value, why not give that directly that way? Whatever it’s worth, on the day of the donation is your charitable contribution deduction, but you don’t have to pay capital gains tax on that. So, Joe, that can be a great way to create a tax deduction in a year where in your income’s high.
Joe: Absolutely a couple of things to with the CARES Act of last year, there was something that was called the coronavirus related distribution and CRT, and that allowed us to take money out of a retirement account a $100,000 from those retirement accounts, and you didn’t necessarily have to pay the tax all in that year. You could either pay the account back over a three year time period or pay the tax over a three year time period. So now looking at this year, if you did take a coronavirus related distribution, what do you want to do with that? You want to pay the tax, do you want to pay it back? So there’s some optionality there as well, depending on if things are going to get back to some sort of a normal with your overall occupation, it might make sense to pay that back. They also took away required minimum distributions. There will be a CARES Act 2.0 that’s coming out. I don’t know if they’re going to suspend them again or change them. I heard that they might move them to age 75, but just know if you have a retirement account, you are required to take dollars from that account and pay the tax on it. Last year there was a reprieve. They didn’t. You didn’t necessarily have to do it. It didn’t happen as of today for 2021. So make sure that you get that back in order. And of course, our favorite Big Al, the old conversion.
Al: Yeah, Roth conversion rate, which we can’t really have a show without talking about a Roth conversion, it seems. So this is where you have money in an IRA 401k, 403(b), something like that that you got a tax deduction. It’s a traditional. And if your tax bracket is low enough, you may want to consider converting some of those dollars that you already got a tax deduction into a Roth IRA. Yes, you pay the taxes on what you convert. But think about this anything that you convert now is in a Roth IRA. Our future principal income growth is tax free forever. It’s tax free for yourself, for your spouse, for your kids, three grandkids. If they inherit them, it’s a tax free account forever. There is currently no required minimum distribution requirement for yourself and your spouse for your kids, though if they inherited it, they now have to drain that account for 10 years. And Joe, that’s a that’s something brand new.
Joe: Yeah, I mean, compounding tax free. Is pretty good in a can help, as well as wealth transfer, so the kids don’t get loaded up with tax. All right, let’s switch gears a little bit. Let’s go to ask the experts.
Al: I retired in 2020, and I’ve just heard about a mega backdoor Roth. How can I take advantage of that for 2021? That’s Paul and Scripps Ranch. First of all, is Paul for you? You cannot take advantage of it. You have to be employed and you told us you just retired so you don’t qualify for what is a mega back door Roth? If you have any 401(k) plan. That allows after tax dollars or dollars that have basis that you’ve already paid tax on. I’m not talking about the Roth component. I’m talking about employers that have a plan that you could put the maximum amount into the plan and some, right? So there’s a lot of employers here in town and San Diego and Southern California that allow you to do that. Those after tax dollars are eligible to be converted into a Roth IRA. So that’s the mega back toward the garage door, right? The barn door, Roth conversion. I don’t know whatever you want to call it. So yes, you can do that. If you’re employed with an employer, it has to come out of the 401(k) plan. If you’re already retired like you just said no bueno. Sorry about that. Paul from Scripps. So what are we learning today? Get a piece of paper, write down your goals, I don’t care how small they are or how large they are, just write them down and then get your financial house in order now that you have your goals in mind. Invest towards the goals that you just established. Of course, you want to get a little bit more strategic. Try everything that you can to control what you can’t control. That’s all we got for you today. Hopefully enjoying the show? Go to yourmoneyyourwealth.com. Click on that special offer. It’s our retirement readiness guide. Updated for 2021. I might add yourmoneyyourwealth.com. Click on that retirement readiness guide. It’s our special gift to you this week. That’s it. We’ll see you again next week. This is your money Your wealth.
