A new year is upon us and plenty of us are hoping for a much different year than the one prior. One thing that most likely remains the same though are our goals for the new year. Many of us have New Years resolutions – if your goals are financially related, here is a helpful guide to getting you on the right track.
Takeaways:
- Importance of a budget and quantifying big ticket items
- Tips to double your retirement savings
- Understanding how much is needed to retire comfortably
- Knowing which accounts are most effective for saving for retirement
- How to reallocate and rebalance your portfolio
- Properly saving for long term, intermediate term, and short term
- Knowing the facts for retirement income and tax rules
Find Where Your Money is Going
Create a budget and break it down between things you need and want. For example, I need a cup of coffee, but I want Starbucks every morning. Determine how some of those costs are going to change and plan for that in your budget – such as a present budget versus a future budget. We have plenty of tools and worksheets to assist people in designing their budget. Too often the inexpensive items add up without us realizing it. Make sure you are aware of where your money is going.
One of the things you want to do when putting together a budget is define your goals. For example, “I want to retire at this particular age”, “I want to upgrade my home in about ten years”, “I want to pay for fifty percent of my children’s education” etc.
Once we define the goals, we can run a gap analysis. This will tell you, based on where you are today, where you want to be, and doing the things you want to do between now and then – plus assuming a certain rate of return, this is what percentage of the goal you can expect to achieve. If you’re not 100% successful with the goal, consider what is needed to change that.
Don’t forget to quantify big ticket items! If you have a mortgage that you will take on, if it is important to you to take nice vacations, or if it is important for you to help aging family members, you need to factor these into your gap analysis and financial plans. Very often people just focus their budgets and decisions on ordinary expenditures, forgetting big ticket goals that they have.
It is Never Too Early to Save for Retirement
The earlier you start saving for retirement, the better! If someone begins contributing $5000 in the first 10 years, but nothing in the next 20 years, they still receive more than someone who waits 10 years to contribute and spends 20 years contributing $5k each year. They pay double the money, but their investment will likely be less. If possible, consider increasing your qualified plan contribution by just one percent this year. This small change can have a major impact on your retirement savings.
The rule of 72 also helps determine how long an investment will take to double given a fixed annual rate of interest. Divide 72 by the annual rate of return and you can get a rough estimate of how many years it will take for the initial investment to duplicate itself.
The rule of 25 helps you understand how much is needed for your retirement and nest egg. If you multiply your salary by 25, you can better gauge how much is needed for a comfortable retirement.
Already Saving? Let’s Make Sure You’re Doing So Effectively!
Already aware of where your money is going and have begun saving for retirement? Now it is time to make sure you are tax diversified. It is important to not just be diversified in terms of stocks and bonds, but also diversified in the way that your money is taxed. Taxable accounts include CDs, money market, cash, stocks and bonds. This is the first place money goes when we get paid. The problem is that Uncle Sam takes a big chunk of money between when we get paid and when the money hits our bank account. Every year we get a 1099 for the interest that we earn. When we sell something, then we pay capital gains so we are always getting taxed then as well.
Then we have tax-deferred accounts – such as a 401(k) and traditional IRA. Tax does not come out of our paycheck and the money grows tax deferred. The problem is that we mostly have to wait until 59.5 until we touch our retirement accounts – so we have savings but have to pay the taxes when we take out the money in retirement and we don’t know what the tax rate will be when we reach retirement.
Finally, we have tax-advantaged accounts. We can’t control the payroll taxes, but we may get tax-advantaged growth and potentially tax free when we take it out. So which one is the best? The answer for most people is have a little bit of each so you can be ready for whatever the situation may be.
If you were invested in the stock market in Jan 2019, you may have noticed that some of the stock indexes returned 22-30 percent domestically and there were terrific returns in all sorts of asset classes. This means that everyone’s portfolio is a bit more aggressive in Jan 2020 than Jan 2019 because those “riskier” assets now make up a much larger percentage of their portfolio. This is why we recommend to rebalance your portfolio at least once a year. In the case of a portfolio that is made up of 60% stocks and 40% bonds – after a good year in the stock market could now be 75% stocks and 25% bonds. Rebalancing will bring you back to your intended asset allocations. This applies in all aspects such as big companies versus small companies, domestic versus international companies, stocks versus bond, etc. So if you have not looked at your 401(k) and rebalanced, make sure to do this in 2021!
Don’t forget to plan for volatility! How do you do it? Think of your money in terms of 3 buckets. First is short term, which is conservative – it is liquid and an emergency fund. Long term accounts are for money we won’t be touching for at least ten years – this is more aggressive and used for retirement, college expenses, etc. And then intermediate – we are not trying to beat the market, but we are trying to beat the bank. Intermediate is typically moderate risk and for goals such as home improvements, college expenses, and aspirational purchases.
Staying Up to Date
Make sure you fully understand your retirement income. Go to the social security website and get your estimate. Check your work record and make sure that the wages the SSA have for you are accurate. With regards to your 401(k), one common rule is called the 4% rule – it is a basic way to figure out the percentage per year you can take from your 401(k). So if we take our current balance, we assume growth rate, and we assume we are going to add in a certain amount of money each year, we will get to a certain number. Let’s assume $1million at retirement. If we take out 4% that means we can take out $40k plus social security and we will have an understanding of what your retirement income will look like.
If you receive a pension, you will want to understand what your pension forecast looks like. It doesn’t matter if you are in your 20s, 30s, 40s, or 50s – it is never too soon to start to plan around the idea of single life versus joint life or lump sum, etc. related to your pension. The earlier you start thinking about it, the better you can ensure sufficient funds and that your family is protected.
There have been recent changes that have been in effect that you may not be aware of in regards to RMDs, IRAs, student debt, and 529 plans. Make sure you know the rules!
Wrapping it All Up
We just threw a lot of information at you! There is a lot to consider to make your planning and saving effective, but it is worth it when your retirement day comes and you are financially prepared. Working with a financial advisor will have a tremendous impact on your planning. Get in touch with us to make sure you reach your financial goals this year!
Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.
Ben Soccodato is a registered representative of and offer securities, investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000 CRN2022-276324