All Posts By

Zach Abraham

Nov 19
0

Navigating Holiday Sales without Breaking the Bank

By | Lifestyle

Thanksgiving brings up many traditions. From watching the Macy’s Thanksgiving Day Parade to enjoying family dishes passed down for generations, there’s so much to look forward to. One tradition that excites countless Americans is Black Friday, and the more recent addition to it, Cyber Monday. These major sales kick off the holiday shopping season. While it might seem exciting to embrace spending money in the name of price markdowns and holiday cheer, it’s important to keep your finances in mind. Here are some tips to get the most out of these sales without breaking the bank.

  1. Know Your Budget

Before even thinking about all the goodies you want to buy, look at your current finances and understand how much you realistically can spend. A big sale should not come at the expense of your financial goals. If you want to get into the nitty-gritty, you can allocate funds to specific categories like electronics, appliances, beauty, sports, etc. Using cash or prepaid credit cards can also help if you are really concerned about overspending.

  1. Make Your List, and Check it Twice

The best way to avoid buying too much is to know what you need to buy in the first place. Make a list of what you plan to buy and stick to it. Once you know what you need, prioritize everything on your list. If you can’t afford everything, a prioritized list will help you decide what to buy now, and what you can put off buying later. On top of that, go back through it a second time and compare the prices to make sure you’re actually saving. If a Black Friday sale only offers 5% off, or a future sale offers more off, it may make more sense for your budget to push that purchase out, so it doesn’t create as much of a strain on your finances.

  1. Avoid Buyer’s Remorse

Many post-sale shoppers are plagued by buyer’s remorse. Making a list is not enough to avoid buying things you don’t need; you must stick to that list. This way you can steer clear of impulse purchases and stay on track with your budget. If for some reason you still find something not on your list that you feel compelled to buy, take a moment to pause and honestly assess if this additional purchase will be beneficial to you. You can do this by closing your eyes and breathing in to the count of four. Fill your belly with air, then hold that breath for the count of eight, and then finally exhale from your belly for the count of four. While doing this, remind yourself not every deal is a must-have and the small amount of regret over not getting something will likely not outweigh the regret of overspending your budget.

  1. Remember, You Have Other Opportunities to Shop and Save

It’s important to highlight that a lot of sales go throughout the entire holiday season now. While Black Friday is still a major sale, it’s not the only sale. Despite this, sales like Black Friday will market themselves as a once in a season opportunity and use tactics that encourage you to buy more than you need. Do your best to refrain from this scarcity mindset that makes you think you need to buy everything during one specific sale. You can ease your mind that if you can’t get something you want on that day, there will likely be another opportunity later in the holiday season.

If you need help defining your budget for the holiday shopping season, give us a call! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395.

 

This document is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions. It is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 24-391.

Oct 30
0

10 Considerations for Year-End Tax Planning

By | Tax Planning

As we head into the holiday season, another season looms in the distance: tax season. Don’t wait until March to see how 2024 shook out for you tax-wise.

Before the year draws to a close, it’s an ideal time to evaluate financial strategies and take advantage of year-end tax planning opportunities. Now is the time to proactively review, consult with professionals, and implement strategies that can potentially benefit you now and in the years ahead.

  1. RMDs (Required Minimum Distributions) Due In Retirement

Required minimum distributions (RMDs) must be withdrawn from traditional retirement accounts like 401(k)s and IRAs by December 31 each year beginning at age 73. There is no grace period to April 15 tax day; RMDs must be taken by December 31.

  1. Calculate RMDs (Required Minimum Distributions) Before Retirement

Even if you are not 73 or older, remember, all the money you have socked away in traditional 401(k)s, IRAs, and similar qualified retirement accounts will require annual withdrawals, and ordinary income taxes will be due on the amounts withdrawn. According to the Social Security Administration, around 40% of Americans must pay federal income taxes on their Social Security benefits—up to 85%—because they have substantial income, like the income created by required minimum distributions.  

  1. Strategic Timing for Roth Conversions

Converting traditional IRAs or other tax-deferred accounts to Roth IRAs can be a strategic move, particularly if you anticipate being in a higher tax bracket in the future. Roth accounts contain already-taxed money, so they offer tax-free growth and withdrawals, meaning you can access your money in retirement without owing any federal taxes provided the account has been in place five years and all other IRS rules are followed. They are also tax-free to your heirs.

While there are no limits on the amounts you can convert, it’s essential to remember that the converted amount will be added to your gross income for the year, potentially affecting your overall tax situation. And since Roth conversions cannot be undone, it’s important to seek professional tax advice.

  1. RMDs (Required Minimum Distributions) Due On Inherited Accounts

This July, the IRS finally issued clarifications about the SECURE Act 1.0 changes on the rules for non-spousal inherited traditional accounts, stating that enforcement will begin in 2025 on accounts inherited after 2019. If you inherited a traditional IRA or 401(k) or similar account, check with your CPA or tax professional now because RMDs will be due or you may owe penalties.

  1. Maximize Retirement Account Contributions

If you are still working, contributing the maximum allowable amounts to tax-deferred retirement accounts like traditional 401(k)s and IRAs can offer a significant opportunity to grow your retirement savings while reducing your taxable income for the tax year. The contribution limit for 401(k) plans for 2024 is $23,000 for individuals under 50, with an additional catch-up contribution of $7,500 for those 50 and older, bringing the total to $30,500. For IRAs, the limit is $7,000, or $8,000 with the catch-up provision for those 50 and older.

  1. Implement Tax Loss Harvesting

If you’re seeking to reduce your taxable capital gains in 2024, tax loss harvesting may be a strategy worth considering. This involves selling underperforming investments, such as stocks and mutual funds, to help realize losses that can offset any taxable gains you may have accrued throughout the year.

  1. Charitable Contributions

A charitable donation is a gift of cash or property given to a nonprofit organization to support its mission, and the donor must receive nothing in return for it to be tax-deductible. Taxpayers can deduct charitable contributions on their tax returns if they itemize using Schedule A of Form 1040, and contributions may be deductible to up to 60% of adjustable gross income for 2024.

  1. Defer Income

Another way to help reduce your tax burden is by deferring, or shifting, income to the next year. If you’re employed, you won’t be able to defer your wages; however, you could delay a year-end bonus to the following year, so long as it’s a standard practice at your company.

  1. Be Mindful of the Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) is designed to ensure that high-income individuals pay a minimum level of tax, regardless of how many deductions or credits they claim under the regular tax rules. The AMT is calculated by adding back certain deductions, such as state and local taxes, that are allowed under the regular system but not under AMT rules. In 2024, the AMT tax exemption for individuals is $85,700, and for married couples it’s $133,300.

  1. Utilize Flexible Spending Accounts (FSAs) and Other Tax-Advantaged Accounts

For 2024, flexible spending accounts (FSAs) offered an increased contribution limit of $3,200, up from $3,050 in 2023, allowing employees to use pre-tax dollars for eligible medical expenses. Contributions to FSAs reduce taxable income, as funds are deducted before federal, Social Security, and Medicare taxes are applied. However, it’s essential to use all FSA funds before year-end to avoid forfeiture under the “use it or lose it” rule. Some employers offer a grace period, extending the deadline to use 2024 funds until March 15, 2025. Exploring other tax-advantaged accounts for 2025, such as dependent care FSAs, might further reduce future taxable income while maximizing the benefit of pre-tax dollars for qualifying expenses.

Don’t let time pass you by, start planning for this upcoming tax season today! If you’re not sure how these tips could be plugged into your overall financial plan, let’s meet together with your tax professional. We’re here to help you end the year strong financially. Give us a call today!

This article is provided for general information only and is believed to be accurate. This article is not to be used as tax advice. In all cases, we advise that you consult with your tax professional, financial advisor and/or legal team before making any changes specific to your personal financial and tax plan.

Sources:  

  1. https://rodgers-associates.com/blog/your-2024-guide-to-year-end-tax-planning/
  2. https://turbotax.intuit.com/tax-tips/tax-planning-and-checklists/top-8-year-end-tax-tips/L5szeuFnE
  3. https://www.tiaa.org/public/invest/services/wealth-management/perspectives/5-year-end-tax-planning-strategies-to-consider-now
  4. https://smartasset.com/taxes/can-short-term-capital-losses-offset-long-term-gains
  5. https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp#
  6. https://www.schwabcharitable.org/giving-2024
  7. https://www.fidelitycharitable.org/guidance/philanthropy/qualified-charitable-distribution.html
  8. https://www.investopedia.com/terms/a/alternativeminimumtax.asp
  9. https://fairmark.com/general-taxation/alternative-minimum-tax/top-ten-things-cause-amt-liability/
  10. https://www.irs.gov/newsroom/irs-2024-flexible-spending-arrangement-contribution-limit-rises-by-150-dollars
  11. https://turbotax.intuit.com/tax-tips/health-care/flexible-spending-accounts-a-once-a-year-tax-break/L8hwzKu7r
  12. https://www.schwab.com/learn/story/rmd-reference-guide
  13. https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html
  14. https://www.usatoday.com/story/money/personalfinance/2024/09/04/inherited-ira-new-irs-tax-rules/75063675007/
  15. https://www.fidelity.com/learning-center/smart-money/inherited-401k-rules
  16. https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it
  17. https://www.irs.gov/credits-deductions/individuals/deducting-charitable-contributions-at-a-glance
  18. https://www.irs.gov/pub/irs-pdf/p561.pdf
  19. https://www.goodrx.com/insurance/fsa-hsa/hsa-fsa-roll-over
Oct 23
0

Now Is the Time To Do Your Year-End Planning

By | Tax Planning

Don’t wait until it’s too late. Some important deadlines loom on December 31, 2024, and many other things should be reviewed, so be sure to meet with your financial advisor as soon as possible.

As the year wraps up, it is important to meet with your financial advisor to make sure you meet all IRS year-end requirements and take steps to plan ahead for 2025. The end of the year is a busy time for everyone and critical due dates are fast approaching. It’s crucial to stay on top of your financial deadlines to avoid last-minute issues!

  1. RMDs (Required Minimum Distributions) Due In Retirement1

Required minimum distributions (RMDs) must be withdrawn from traditional retirement accounts like 401(k)s and IRAs by December 31 each year beginning at age 73. There is no grace period to April 15 tax day; RMDs must be taken by December 31.

Failure to adequately withdraw funds could result in a 25% excise tax in addition to taxes owed, and there are many rules to follow about amounts due as well as which accounts require withdrawals or can be aggregated for one withdrawal. This is why it’s recommended that you work with your tax and financial professionals to do the calculations and implement the withdrawals on your behalf.

  1. Calculate RMDs (Required Minimum Distributions) Before Retirement

Even if you are not 73 or older, at least five to 10 years before you plan to retire you should start working with your financial advisor to calculate your future RMDs in case there are strategies you can implement now that can help you lower your overall tax burden in the future.

Remember, all the money you have socked away in traditional 401(k)s, IRAs, and similar qualified retirement accounts will require annual withdrawals, and ordinary income taxes will be due on the amounts withdrawn.

According to the Social Security Administration,2 around 40% of Americans must pay federal income taxes on their Social Security benefits—up to 85%—because they have substantial income, like the income created by required minimum distributions.

  1. RMDs (Required Minimum Distributions) Due On Inherited Accounts3

This July, the IRS finally issued clarifications about the SECURE Act 1.0 changes on the rules for non-spousal inherited traditional IRAs (individual retirement accounts), stating that enforcement will begin in 2025 on accounts inherited after 2019.

The clarifications are as follows:

a.) If the original retirement account owner had started taking RMDs before passing away, non-spousal beneficiaries must continue taking annual RMDs based on the owner’s schedule and deplete and close the account completely by the end of year 10.

(According to the IRS, if you chose not to take a RMD while waiting for this clarification to come out, you won’t be subject to the typical 25% penalty on the amount you should have withdrawn based on the original account owner’s schedule. But when the rules go into effect next year, the 10-year clock will still begin the year you inherited the account.)

b.) If the original IRA account owner hadn’t taken any RMDs before passing away, annual RMDs are optional, but the account must be emptied by the end of the 10th year of inheritance.

  1. Inherited 401(k) Accounts4

Inherited traditional 401(k) accounts must also be closed and taxes paid within 10 years of inheritance. But keep in mind that each company’s retirement plan has its own set of rules which will also have to be followed; for instance, some companies will allow you to keep the account in their plan during the 10 years and others won’t.

  1. Inherited Roth Accounts

Roth accounts are created and contributed to with already-taxed money; therefore, taxes are not due as long as all rules are followed, but inherited Roth IRA and Roth 401(k) accounts must also be emptied and closed within 10 years of inheritance. Non-spousal inherited Roth 401(k) accounts do require RMDs.4

  1. Roth Conversions5

As part of your retirement plan, your tax and financial advisor may recommend that you do a series of Roth conversions—converting taxable accounts to tax-free Roth accounts—in order to mitigate taxes for the long-term.

If you decide to do these, ordinary income taxes will be due on the amounts converted, and Roth conversions they must be completed by December 31. These cannot be undone, so they must be undertaken very carefully following all IRS rules.

  1. Charitable Contributions6

Tax-deductible charitable contributions must be completed by December 31, and the fair market value (FMV) of non-cash items must be determined.7

  1. FSA (Flexible Spending Accounts), Spend It Or Lose It8

Flexible savings accounts (FSAs) through your employer allow you to have pre-tax funds deducted from your paycheck to spend on allowable expenses like healthcare and child care. Most FSAs don’t allow you to roll your excess funds into the next year. Some ideas to avoid losing funds left in your FSA include booking general wellness appointments like visits to the eye doctor, annual physicals and dental cleanings.

(If you are able to procure a high-deductible health insurance plan, you may be able to contribute pre-tax funds to an HSA (health savings account) which will not have to be emptied, but may be used for allowable healthcare expenses in retirement. Be sure to ask your financial advisor about this possibility.)

  1. Other Things to Review

It’s very important to review your named beneficiaries on retirement accounts, insurance policies, and your estate plan. Births, deaths, divorces, and marriages can change your family through the years, and it’s important to keep everything up to date.

You should also review your expected tax liability for 2025, your FSA/HSA contribution amounts for 2025, your paycheck withholding amount if you are still working, your monthly budget, and your investment portfolio.

As you get older, it’s important to start lowering your market risk in order to protect the assets you have accumulated. It’s important to know that diversifying with different asset classes can help protect your overall portfolio, especially important during times of increased market volatility and as you get closer to retirement.

We’re here to help you with year-end planning as well as meeting IRS deadlines in conjunction with your tax professional. Call us as soon as possible if we haven’t spoken already! You can reach Bulwark Capital Management at 253.509.0395.

 

Sources:

  1. https://www.schwab.com/learn/story/rmd-reference-guide
  2. https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html
  3. https://www.usatoday.com/story/money/personalfinance/2024/09/04/inherited-ira-new-irs-tax-rules/75063675007/
  4. https://www.fidelity.com/learning-center/smart-money/inherited-401k-rules
  5. https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it
  6. https://www.irs.gov/credits-deductions/individuals/deducting-charitable-contributions-at-a-glance
  7. https://www.irs.gov/pub/irs-pdf/p561.pdf
  8. https://www.goodrx.com/insurance/fsa-hsa/hsa-fsa-roll-over

 

This document is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions. It is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.
Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein.
Trek 24-358.
Sep 18
0

Understanding Life Insurance: 7 Things You Should Know

By | Financial Planning, Life Insurance

Life insurance is an important part of a comprehensive financial plan. Here are 7 things you should know about it.

At its simplest, you probably already know that life insurance provides funds in the case of unexpected loss of life. But there may be other aspects of life insurance that are less clear to you. If there are things about life insurance that you don’t understand, you are not alone! In fact, from research conducted by LIMRA in 2019, American consumers answered “don’t know” to 40% of the questions on a life insurance knowledge test, and if they did answer, they were correct less than half the time (46%).1

Not to worry. It’s September, which means it’s Life Insurance Awareness month, and we’re here to clear up some of the basics about life insurance.

1) Policy Beneficiaries Receive Payouts

The beneficiary or beneficiaries named on a life insurance policy are the ones who receive the payout from the insurance company that issues a life insurance policy. Often a spouse, child, or other loved ones are named as beneficiaries, but in some cases, the beneficiary of a life insurance policy might be a trust.

NOTE: It is very important that a policy owner keeps policy beneficiaries up to date as situations, ages, and relationships change through time. An annual review is recommended.

2) A Life Policy Is “Written On” a Named Insured or Insured Persons, Not Always the Policy Owner

A “named insured” on a life policy is the one whose life is being insured. Generally, an insured person will purchase a policy on themselves, naming themselves as the insured, so that when they die, the death benefit goes to their chosen beneficiaries.

But an owner is not always the same as the insured. As an owner, you control the policy, and you can purchase a life insurance policy on someone else, as long as you would suffer from their death as a family member, business partner, or some other close relationship.

For instance, sometimes spouses will purchase policies naming each of them as joint insureds. These can be set up as “first to die,” where the surviving spouse or other named beneficiary receives the death benefit as soon as the first spouse dies, or as “second to die” (sometimes called “survivorship”) policies that only kick in to pay beneficiaries after both insureds have passed away.

In some cases, you might want to purchase a policy but make someone else the owner, for example, as a strategy inside a trust.

Or sometimes a parent or grandparent will purchase a policy naming a child or toddler as the insured. Naming the child when they are young and healthy (while the cost of insurance is low) can be done as a strategy to help save for the child’s future college expenses, and to ensure that the child has life insurance in place should they develop a health condition later.

3) Life Insurance Usually Requires Medical Underwriting

Life insurance usually requires medical underwriting, which means that once you apply for a life insurance policy, the insured person’s lifestyle, height and weight, medical history, and general level of health will be assessed (and approved) before your policy will be issued. Sometimes a physical exam will be required, and sometimes life insurance coverage will be denied, for example, if the insured person has a terminal condition. But even if you are in poor health, you may be able to obtain a life insurance policy at a higher cost.

And you may be able to purchase life insurance even if you are age 70 or older. In fact, more people are doing so because the estate tax exemption amount is set to drop to around half the amount it is now in the 2026 tax year, and consumers are seeking tax advantaged strategies to pass on wealth to their heirs.2

4) Premiums Are What You Pay for Insurance

The word “premium” in the context of a life insurance policy is how much you will pay monthly, annually, or once for single premium life insurance policies. Premiums are determined on an individual policy basis based on many factors, including age, health, and credit.

5) Most Life Insurance Payouts—aka Death Benefits—Are Tax-Free and Probate Free

The money paid by an insurance company to a beneficiary upon the death of the insured person is called a “death benefit.” In most cases, a death benefit is tax-free and bypasses the probate process unless it’s paid to a trust, in which case different IRS rules may apply.

This can be a tremendous help to the spouse and family members during their time of grief and beyond as they look to their futures. It’s often recommended that a life insurance policy’s death benefit be in an amount that can cover monthly living expenses, mortgage payments, future college expenses, etc., protecting families from immediate and future economic devastation.

6) Life Insurance Can Be Used for Estate Planning Trusts and Business Succession Plans

It’s important when setting up complex estate plans, trusts, and business succession plans which may include life insurance that you consult with a team comprised of your financial advisor, estate attorney and CPA/tax professionals. IRS rules and tax laws are always in flux.

For instance, a recent Supreme Court ruling may change the tax ramifications of business buy-sell agreements. Be sure to meet with your team of advisors to review.3

7) There Are Many Types of Life Insurance

In addition to term life policies, there are many permanent life insurance policies, including whole life, universal life and variable life. While a death benefit is always part of a life insurance policy, different types of life insurance policies are structured differently, and may contain additional features as part of the structure of the policy itself, or available as a “rider” to the policy for an additional premium amount. For instance, some policies even offer coverage for long-term care should you develop the need for it but provide a death benefit for your heirs if you don’t.

Life insurance is complex, and a life insurance policy is a contract between you and an insurance company. It is recommended that you work with your team of advisors to examine each contract clause thoroughly before purchasing a life insurance policy.

If you would like to discuss life insurance, please contact us! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395. 

This document is for general information purposes only and is not to be relied upon for financial advice. In every case, you should seek the advice of qualified tax, financial and legal professionals to ensure that a life policy is advisable based on your unique circumstances.

Life insurance often requires medical underwriting. Guarantees are provided by insurance companies and are reliant upon the financial strength and claims-paying ability of each individual insurance carrier issuing a life insurance contract.

Sources:

  1. https://www.limra.com/siteassets/newsroom/help-protect-our-families/consumer-insights/2021/january/marketfacts_what-consumers-dont-know-anout-life-insurance.pdf
  2. https://www.thinkadvisor.com/2024/08/26/u-s-life-application-activity-soars/
  3. https://www.kitces.com/blog/business-buy-sell-agreements-connelly-v-irs-internal-revenue-service-supreme-court-entity-purchase-agreements-life-insurance-llc/

 

This document is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions. It is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 24-328.

Aug 22
0

Ways to Save for College Costs

By | Financial Planning

It’s back to school season—a perfect time to think about your children’s future. Parents and grandparents should start planning for college costs as early as possible.

Most Americans would do almost anything for their children and grandchildren, and the opportunity to send these children to college is a top priority for many people. According to studies, more than 50% of parents are willing to go into debt to fund their child’s college education, and at least 95% of parent expect to cover at least half the costs.[1] [2]

The trouble is, college debt is extremely high—currently $1.77 trillion in the U.S.[3] The average student loan debt amount is now $37,338 according to recent data.[4]

Why is college debt so high? Well, for one thing, the average in-state tuition cost at public four-year institutions is $11,260 for the 2023-24 school year—and that’s per semester. That is about three times as high as it was in 1989-90, according to the College Board.[5]

And on top of that, interest rates have risen. For the 2024-25 school year, federal parent PLUS loans will be at their highest point in more three decades, at a whopping fixed interest rate of 9.08% plus fees. [6]

So, what is a loving parent or relative to do? Here are some of your options.

1) 529 Plans[7] 

A 529 plan, technically known as a “qualified tuition program” under Section 529 of the Internal Revenue Code, is an education savings plan off­ered by all 50 states and the District of Columbia. There are generally two types—prepaid tuition which allows you to lock in today’s tuition rates for the future college attendee, and the more popular 529 savings plan.

Keep in mind that you aren’t restricted to your own state’s plan. You can invest funds in any state’s plan, and your student can attend college in any state. Each state’s 529 plan is unique, with a diff­erent combination of sales channels, investment off­erings and fees. It can pay to shop around when choosing a plan because even if your state off­ers a tax deduction or credit for contributing to your state’s plan, that benefit might not stack up against the performance or lower cost of another state’s plan.

 

PROS

 

As of 2023, if a 529 plan is owned by a grandparent, aunt, uncle or other person, it is virtually invisible on the FAFSA’s calculations for both assets and won’t count as student income later if used for qualified expenses.[8]  

 

Although contributions to a 529 plan aren’t tax deductible on your federal tax return, the earnings grow tax-free when withdrawn and used for qualified education expenses.

 

Many states o­ffer state income tax deductions for contributions if you choose to invest in your state’s plan. (Your child can still attend college anywhere.)

 

There are no income limits on 529 plan contributions, so they’re available to everyone. You may want to limit contributions to either the amount you think tuition will be, or the annual gift tax exclusion amount.

 

  

CONS

 

If owned by a parent or student, a 529 plan is counted as an asset on the student’s FAFSA (free application for federal student aid), although only a percentage of the total account is calculated.

 

There are limited investment options available with 529 plans, and only one investment change per year is permitted. Some plans have high costs and fees.

 

If your child, you or any family member does not want to attend college, and if 529 plan money is withdrawn and not used for education expenses, the account’s earnings are subject to both income tax as well as a 10 percent penalty tax, and you may have to pay back any state income tax deduction amounts as well. (There are exceptions to 529 plan penalties if your student receives scholarships.)

 

 

2) Roth IRAs[9]

If a 529 plan doesn’t work for your family for some reason, a Roth IRA (individual retirement account) may be an option to consider. You can withdraw money from Roth IRA accounts to be used for college expenses for you, your spouse, children or grandchildren as long as the account has been in place for five years. If the account owner is under age 59-1/2, the only tax liability for college expenses will be on any withdrawn earnings—if over 59-1/2, the entire withdrawal amount is tax- and penalty-free for any purpose as long as you’ve owned the account for five years.

 

PROS

 

There is a lot of flexibility with a Roth—you can invest in nearly any type of account you want to within a Roth IRA wrapper.

 

If your child doesn’t choose to go to college, the money can be used for any purpose, including retirement, with no mandated withdrawals or RMDs (required minimum distributions) or taxes due. Inherited Roth IRA accounts are also tax-free.

 

 

  

CONS

 

One of the difficulties with Roth IRAs is that high earners can’t open them, and the yearly limit in 2024 for contributions is only $7,000 ($8,000 per year for those 50 or older). In some cases, what’s called a “backdoor Roth” might be indicated for high earners, where they can legally convert taxable IRA funds into Roth IRA accounts and pay taxes on the money converted, but these are complex and strict IRS rules apply.[10]

 

While a Roth IRA does not show up as an asset for financial aid calculations, amounts withdrawn and used for college expenses are considered income for the next school year, and therefore may reduce the amount of student financial aid that’s available.

 

 

3) Life Insurance[11]

Permanent life insurance policies, such as whole or universal life, include both a death benefit and a savings/cash account component which you can borrow against to pay for college.

 

PROS

 

Many permanent cash value policies regularly credit the policy with interest in a guaranteed* amount specified in the policy terms (*guaranteed by the claims-paying strength of the issuing insurance company.)

 

Money borrowed from the cash value in a life insurance policy is not taxable in most cases. Interest credited to a life policy grows tax-deferred, but the credited interest portion is taxable if that part of the money is borrowed for any purpose, including college.

 

If the insured dies, the death benefit plus remaining cash value is almost always tax-free when left to individually-named beneficiaries.

 

Buying a flexible, permanent policy for a child at a young age when they are healthy can ensure that they are insurable even if there’s an unexpected future adverse event; for instance, if they develop a severe illness later.

 

  

CONS

 

While a life insurance policy does not show up in financial aid calculations as an asset, amounts borrowed to pay for college are considered as income on the next year’s FAFSA, potentially reducing the amount of student financial aid available.

 

Life insurance policies can be costly for those who are older or in poor health. If you are using life insurance to pay for college, consider buying the policy when the child is a healthy toddler—with them as the insured to keep the cost of insurance low.

 

If you borrow money from the cash portion of a permanent life insurance policy, interest is charged by the insurance company on the amount borrowed until you pay the money back—in essence, you are paying “yourself” back—and regular premium payments must be made to keep the policy in force. It is advisable to work with a qualified professional to examine the structure of any policy so that you understand its terms.

 

 

4) Annuities[12]

Annuities are another option to consider.

 

PROS

 

Annuities can offer a tax-advantaged option for college costs in some cases because annuity policy growth is not taxed until funds are withdrawn.

 

You could purchase a fixed annuity with a short payout schedule to make payments to cover tuition, but you may have to contribute a significant amount to achieve the payout needed. Another way to potentially make an annuity work is to start early when your child is young and purchase a deferred annuity policy which guarantees* a high credited interest rate (*guaranteed by the claims-paying strength of the issuing insurance company).

 

  

CONS

 

While an annuity does not show up on the FAFSA as an asset, annuity amounts paid out are considered income the next year, which can reduce your student’s chances of receiving financial aid. So rather than taking annuity payments while attending college, optionally you could take out student loans, allowing your annuity to continue to grow, then use the annuity to pay off­ the loans after graduation depending on interest rates, crediting rates, and whether or not it saves you money in the long run.

 

 

 

 

How College Savings Can Impact Financial Aid Eligibility

Working with a qualified financial and tax professional is advised when planning for college costs. Legislation is always changing for parents and grandparents looking to get a jump-start in funding their child or grandchild’s education. For example, due to the FAFSA Simplification Act of 2020, in July of 2023 the EFC (expected family contribution) was replaced by the SAI (student aid index).[13]

Where the EFC bottomed out at $0, the SAI goes as low as -$1,500, meaning students can qualify for more need-based financial aid. SAI also simplifies the FAFSA form itself, drastically reducing the number of questions. Where possible, the new law mandates data received directly from the IRS be used to calculate the SAI and federal Pell Grant eligibility.[14]  

Where the new SAI may truly be a boon to students who need more aid is through 529 plans owned by extended family members. As of July 2023, 529 accounts owned by grandparents, aunts, uncles or others are not counted as assets, nor are qualified distributions taken from them counted as income. Therefore, they no longer have significant impact on eligibility for financial aid.[15]

FAFSA (free application for federal student aid) and the CSS (college scholarship service)[16]  

While it is true that life insurance, annuities and 529 plans owned by anyone other than parents or students are not counted as assets on the FAFSA, they may be counted on the CSS (College Scholarship Service) profile, another aid form used for aid by about 240 colleges in addition to the FAFSA. The CSS profile is extremely complex and steps are being taken to simplify it, but changes to the form have not been finalized.

More Resources

Federal Student Aid Estimator https://studentaid.gov/aid-estimator/

FAFSA https://studentaid.gov

If you have any questions or would like to discuss your family’s financial goals, please call us! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395. 

This article is for general information purposes only and should not be relied upon for financial or tax advice. In every case, it is recommended that you work with financial, tax and legal professionals to determine what might be best for you and your family based on your unique situation and circumstances.

Sources:

[1] https://www.cnbc.com/2019/06/04/most-parents-would-go-into-debt-for-the-sake-of-a-childs-college-fund.html

[2] https://www.investmentnews.com/industry-news/news/how-much-are-parents-willing-to-cover-for-their-kids-college-252891

[3] https://www.lendingtree.com/student/student-loan-debt-statistics/

[4] https://educationdata.org/average-student-loan-debt#

[5] https://research.collegeboard.org/trends/college-pricing/highlights#

[6] https://www.usatoday.com/story/money/personalfinance/2024/05/28/parent-plus-loan-rate-2024-25-soars/73824155007

[7] https://www.investopedia.com/terms/1/529plan.asp

[8] https://www.greenbushfinancial.com/all-blogs/grandparent-529-college-savings#

[9] https://www.thrivent.com/insights/college-planning/using-a-roth-ira-for-college-weighing-the-pros-and-cons

[10] https://www.investopedia.com/terms/b/backdoor-roth-ira.asp

[11] https://www.bankrate.com/insurance/life-insurance/life-insurance-or-529/#permanent

[12] https://www.athene.com/smart-strategies/using-an-annuity-to-help-pay-for-college.html

[13] https://studentaid.gov/help-center/answers/article/fafsa-simplification-act

[14] https://unicreds.com/blog/student-aid-index

[15] https://www.savingforcollege.com/intro-to-529s/does-a-529-plan-affect-financial-aid#

[16] https://www.ncan.org/news/590316/Changes-to-the-2022-23-CSS-Profile-Heres-What-You-Need-to-Know.ht

 

This document is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions. It is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 24-309.

 

Jul 26
0

Personal Finance: The Importance of Starting Early

By | Financial Planning, Retirement, Social Security, Tax Planning

Whether you’re just starting out in your career, you are a Gen-X-er sandwiched between your kids’ college expenses and aging parents’ needs, or you are a Baby Boomer eyeing retirement, starting early can help when it comes to your finances. Here are some reasons why.

When You’re Young—In Your 20s

We’ve all heard the famous quote by Albert Einstein, the one where he said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” And it’s true. In many cases, if you start out early—perhaps in your teens or 20s—saving just a small amount each month, you can amass more money through time than if you start saving at a later age, even if you save a larger amount each month. Of course, it depends on what you invest in. Be sure to check with a trusted financial advisor about how this works.

Investopedia uses this example:

Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.

Who will have more money saved up in the end? Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.

When You’re Older—In Your 40s, 50s or Early 60s

As you head into retirement, starting early to map and plan out your retirement—well before you retire—can help you for many reasons, because there are a lot of moving pieces to consider. Plus, everyone’s situation is completely different and what might work for someone else might not be right for you at all. For instance, one person’s desired retirement lifestyle could be drastically different than another person’s, requiring different budget amounts. (Consider whether you want to stay home and become a painter, or travel the world with your entire extended family. That’s what we mean by drastically different budgets.)

Once you have your required retirement budget amount settled, timing then becomes very important. A financial advisor with a special focus on retirement can really make the difference by laying out a retirement roadmap just for you. Here are some of the things you should know and think about:

1) Medicare Filing – Age 65

You are required to file for Medicare health insurance by age 65 or pay a penalty for life. To avoid this penalty, be sure to sign up for Medicare within the period three months before and three months after the month you turn age 65. If you are still working or otherwise qualify for a special enrollment period, you can sign up for Part A which is free for most people, and then sign up for Part B after you retire. Visit https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties to learn more about penalties and how you can avoid them.

You are required to have Medicare coverage if you are not working or covered by a spouse with a qualified health insurance plan, and Medicare (other than Part A) is not free. In fact, it costs more if your income is higher. Your Medicare premium is often deducted right out of your Social Security check, and premiums generally go up every year.

When you sign up for original Medicare Part B or a replacement Medicare Advantage plan, the least amount you will pay for 2024 is $174.70 per month per person. For those with higher incomes, the Medicare premiums you pay are based on your income from two years prior—those with higher incomes pay more. For couples filing jointly, the highest amount you might pay for Part B coverage if your MAGI (modified adjusted gross income) is greater than or equal to $750,000 is $594.00 per month per person for 2024.

So, depending on your income for the tax year two years prior to filing for Medicare, your premium could be from $174.70 to $594.00 in 2024, or somewhere in between.

If you plan ahead, your advisor might help you plan to take a smaller income in the years prior to turning age 65 in order to keep your Medicare premium smaller. For instance, some people might want to retire at age 62 or 63 and live on taxable income withdrawn from their traditional 401(k) or IRA account/s before they even file for Medicare or Social Security. Each person’s situation is completely unique, but advance retirement planning may help you come out ahead in the long run.

2) Social Security Filing – Age 62, 66-67, 70 or sometime in between

Another moving piece in the retirement puzzle is Social Security. The youngest age you can file for Social Security is age 62, but a mistake some people can make is thinking that their benefit will automatically go up later when they reach their full retirement age—between age 66 to 67 depending on their month and year of birth. This is not the case. If you file early, that’s your permanently reduced benefit amount, other than small annual COLAs (cost of living adjustments) you might or might not receive based on that year’s inflation numbers.

Filing early at age 62 can reduce your benefit by as much as 30% according to Fidelity. Conversely, waiting from your full retirement age up to age 70 can garner you an extra 8% per year. (At age 70, there are no more benefit increases.)

Planning ahead for when and how you will file for Social Security can make a big difference in the total amount of benefits you receive over your lifetime. And married couples, widows or widowers, and divorced single people who were married for at least 10 years in the past have even more options and ways to file that should be considered to optimize their retirement income.

3) Taxes In Retirement

Thinking that your taxes will automatically be lower during retirement may not prove true in your case, and it’s important to find out early if there is a way to mitigate taxes through early planning. Don’t forget that all that money you have saved up in your traditional 401(k) will be subject to income taxes—and even your Social Security benefit can be taxed up to 85% based on your annual combined or provisional income calculation.

And the IRS requires withdrawals. Remember that by law RMDs (required minimum distributions) must be taken every year beginning at age 73* and strict rules apply. You must withdraw money from the right accounts in the right amounts by the deadlines or pay a penalty in addition to the income tax you will owe on the mandated distributions.

Planning ahead to do a series of Roth conversions—shifting money in taxable accounts to tax-free* Roth accounts—might be indicated to help lower taxes for the long-term in your case, but these must be planned carefully and are not reversible.

 

*There is a unique rule since 2022. If you reach age 72 after December 31, 2022, you must begin receiving required minimum distributions by April 1 of the year following the year you reach the age 73.

This means that RMDs (required minimum distributions) must be taken by midnight April 1st of the year following the year you reach the age 73, and then by midnight December 31st of every year after the year you reach age 73.

This creates an opportunity for someone who turns 73 to delay their first RMD until the following year (by April 1) and then take their 2nd RMD that same year by December 31st. So, two RMDs in one year if desired. Then one RMD forever afterwards.

 

Let’s talk about your financial and retirement goals and create a plan to help you achieve them. Don’t put it off—give us a call! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395. 

*In order for Roth accounts to be tax-free, all conditions must be met, including owning the account for at least five years.

This article is for general information only and should not be considered as financial, tax or legal advice. It is strongly recommended that you seek out the advice of a financial professional, tax professional and/or legal professional before making any financial or retirement decisions.

Sources:

https://www.investopedia.com/articles/personal-finance/040315/why-save-retirement-your-20s.asp

https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties

https://www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles

https://www.ssa.gov/benefits/retirement/planner/agereduction.html

https://www.fidelity.com/viewpoints/retirement/social-security-at-62

https://content.schwab.com/web/retail/public/book/excerpt-single-4.html

https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html

https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

 

Trek 24-291

Jun 28
0

Annuity Sales Are Surging. Do You Know What They Are?

By | Annuities, Financial Planning, Retirement

We’re here to help clear up some of the confusion about annuities during Annuity Awareness Month, which happens each June!

In the first quarter of 2024, U.S. annuity sales were $106.7 billion, the highest first quarter total since the 1980s, when LIMRA first started tracking annuity sales. Despite these high sales numbers, research indicates that many people don’t really know what annuities are.1,5

One recent study revealed that only 9% of consumers say they feel very knowledgeable about annuities,1 while other studies confirm this lack of understanding. Research by the American College of Financial Services gave older Americans a score of 12% out of a possible 100% for their knowledge of annuities based on their performance on a short quiz. And a TIAA Institute and Stanford University study showed that the annuity ranks dead last—respondents know more about Medicare, life insurance and long-term care than annuities.2

During Annuity Awareness Month, we wanted to cover some facts we hope will help you understand annuities better.

Annuities Are Ancient

The concept of the annuity goes back centuries. In fact, during the Roman Empire, soldiers and their families would receive annual payments for life known as “annuas” in return for their military service; this is the origin of the word “annuity.” In the Middle Ages, annuities were available in France during the 17th century, when lifetime annuities (called “tontines”) could be purchased from feudal lords in exchange for an initial upfront payment.3

In other words, for millennia, annuities have been around to provide regular income during retirement. Fast forward to today.

Annuities Are Contracts

When you invest in something, typically you assume all the risk. Since annuities are not investments, but instead are contracts between you and an insurance carrier, one of the main risks you assume with annuities is that the payouts will be made per the terms in your contract. Certain contractual guarantees* are made by any insurance company which issues an annuity, and these guarantees are subject to that company’s financial strength and claims-paying ability.

It is very important that you have a trusted financial professional, tax professional and/or legal professional by your side to examine the terms and language of your annuity contract as well as provide information about the insurance company’s financial rating before you make any decision.

In fact, this is good advice when making any decision that involves investing or entering into any kind of a contract. Some financial industry experts and academic leaders in the financial field, like Dr. Roger Ibbotson, have found that annuities belong in the fixed portion of some people’s retirement portfolios (depending on their individual situation) because of insurance company guarantees.

But there are many different types of annuity contracts.

Today’s Annuities Are Complex

Despite their simple structure in the beginning, annuities have become increasingly sophisticated over time. In addition to providing retirement income, insurance companies have added more features to provide retirees with coverage for spouses, long-term care, death benefit for heirs, etc., either as part of the basic annuity or added on as a rider for an additional cost.

While not a comprehensive list, below is basic information about how some annuities work. We recommend that you work with a financial professional to help you compare and choose between the hundreds of annuity contracts available from dozens of different insurance companies. As with any contract, it’s important to read and understand the fine print before you sign, and you should compare policies from multiple insurance companies to find the best value. That’s where a good independent financial advisor can help.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand because they work similarly to the way a bank CD (certificate of deposit) works. An insurance company will pay a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years.

Variable Annuities

Variable annuities were developed in the 1950s, and unlike most other types of annuities, before purchase they require that you be issued a prospectus, since part of your money will actually be invested in the stock market. This means that there is market risk involved with variable annuities—you can either make money on the amount invested in what’s called “sub-accounts,” or you can lose it depending on market performance.

Variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments. But depending on contract terms, your annuity payments may fluctuate based on stock market performance, and it’s possible that some variable annuity policies can lose principal due to stock market losses.

Fixed Indexed Annuities

Fixed indexed annuities (FIAs) were first designed in 1995. The biggest difference between FIAs and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. Instead, a selected index (such as the S&P 500) is used as a benchmark for policy credits at periodic intervals, such as annually.

Many FIA contracts offer a minimum amount which gets credited, and nearly all FIA contracts will not credit less than 0%, which means even that if the benchmark index loses money, your FIA contract value will not go down. With fixed indexed annuities, after you have owned the policy for a specified number of years (called the “surrender period”) your principal is guaranteed* and credits, therefore any policy gains, are locked in.

In other words, with fixed indexed annuity contracts, you have the potential to participate in market gains but are protected from market downturns. And most FIAs offer the option of lifetime income no matter how long you live either as part of the main annuity contract, or available as a rider for an additional charge.

Other Things to Know About Annuities

*The guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Some annuities can be purchased on a deferred basis, and some on an immediate basis, and you can use pre-tax or after-tax funds. It’s important to get professional help to understand the implications for your particular situation.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor and tax and legal professionals can help you compare and analyze policies.

Are You Prepared for Retirement?

With people living much longer and pensions quickly becoming a thing of the past, annuities can help provide income throughout retirement and help quell the fear of running out of money. If you are considering the purchase of an annuity, it’s important to speak with a financial professional who understands them, and can explain the fine print of an annuity contract.

Contact us to explore your options! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395. 

This article is provided for general information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

 

 

Sources:

1 https://insurancenewsnet.com/oarticle/consumer-knowledge-gap-persists-despite-booming-annuity-sales

2 https://www.usatoday.com/story/money/2024/04/30/annuities-are-good-retirement-investment/73437135007/

3 https://www.nber.org/system/files/working_papers/w6001/w6001.pdf

4 https://www.wealthmanagement.com/insurance/ibbotson-fixed-indexed-annuities-beat-out-bonds

5 https://www.limra.com/en/newsroom/news-releases/2024/limra-first-quarter-u.s.-annuity-sales-mark-14th-consecutive-quarter-of-growth/

 

Any annuity guarantees are backed by the financial strength and claims paying ability of the issuing insurance company and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract.

Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Crediting methodologies can be complex and difficult to comprehend. You should make sure you understand the risks and rewards of any annuity before considering an investment.

This document is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions. It is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. TREK 24-280

May 21
0

What is Sequence of Returns Risk?

By | Investments, Retirement

Sequence of returns risk can put your retirement portfolio in jeopardy, but what is it, and how do you fight it?

We get it. Retirement can be scary. We know this because it’s our job to help our clients plan for and seamlessly transition into what should be one of the most rewarding times of their lives. What we often find, however, is that most are worried about retirement because of the risks that come with it. But what are some of the risks that strike fear in the hearts of retirement hopefuls? Well, the first is related to longevity—it’s the possibility of running out of money as you get older, and being unable to go back to work in order to support yourself. We also find that people getting ready to retire are concerned about inflation, the cost of health care, the possibility of needing long-term care and more.

There’s one risk, however, that hides in the shadows, waiting to rear its ugly head and throw turbulence into the lives of new retirees and those right on the edge of retirement. It’s called market risk, or the possibility that you could lose your retirement money during market crashes or downturns. How might this look? Specifically, something called sequence of returns risk can be the most dangerous aspect of market risk. And while it might sound complicated, it’s a simple concept with the potential to have major implications on your retirement dreams. Let’s go over what sequence of returns risk is, as well as a few ways you may be able to fight it!

What is Sequence of Returns Risk?

Simply put, sequence of returns risk is the risk of negative market returns occurring right before you retire and/or very early in your retirement. During this time, market downturns can have a much more significant impact on your portfolio.

Again, it might sound like some buzzword the financial industry throws around to scare consumers, but sequence of returns risk is exactly what it sounds like. It’s the sequence, or the order, in which your portfolio provides market returns. It’s key to remember that sequence of returns risk is specifically associated with money directly invested in the market. That means it could apply to vehicles like employer-sponsored retirement accounts, traditional and Roth IRAs, mutual funds, brokerage accounts, variable annuities and any other assets that can lose value during market downturns.

Now, let’s think about your goals for your retirement. If you’re just starting your career, or you’re right in the middle of your working years, you may contribute to your various saving and investing vehicles with the goal of having a large pool of funds when you finally retire at, say, 65 years old. You’d hope that diligent saving and favorable returns would bring your assets to their highest total right at that point, giving you ample funds to draw from once you retire.

Sequence of returns risk is the potential of the market dipping near the end of your career, or in the first few years of your retirement, meaning those drops affect your account balances at their peak. You would then take losses on greater amounts of money, creating greater losses. While you never want to experience dips, it makes sense why you’d hope those periods of market volatility that you will likely encounter at some point during retirement occur farther down the road, especially when you’re concurrently withdrawing money to support your lifestyle.

An Example Where Both Retirees Have $1 Million Saved

Just as an example, let’s consider two retirees, and what happens during their first 10 years of retirement. Both have $1 million saved, and they both determine they need to withdraw $50,000 per year from their accounts to fund their lifestyles.

Our first retiree is lucky. They retire and then experience eight years of a bull market, growing their portfolio by 5% each year. In the next two years, however, they experience declines of 5%, bringing their balance back down.

The other retiree sees the exact opposite sequence. They immediately encounter a bear market upon entering retirement, which drops their accounts by 5% in each of the first two years. Then the market rebounds and goes up 5% each year for the next eight years.

Both retirees continued to withdraw $50,000 per year from their accounts. So, what was the result?

Even though both retirees had the same initial balance, withdrew the same amounts, experienced eight years of bull markets and two years of bear markets, the order or “sequence of returns” made a big difference.

The first retiree didn’t experience market dips at the beginning when their account balances were highest. At the end of the 10-year period, they still had $788,329 left in their account.

The other retiree, on the other hand, wasn’t so lucky. They took losses during the first two years of their retirement, on their highest balances, and by the end of the 10-year period, they only had $695,226.

(Please remember this example is purely hypothetical and not reflective of real scenarios or real people. We simply used a starting balance of $1 million for each person, then subtracted $50,000 in income at the beginning of each year, then multiplied the accounts’ balances by the annual positive or negative effect on the market we imagined for this example. Actual market returns are unpredictable and tend to vary far more than in the case study shown. This is strictly to display the potential effects of the aforementioned risk.)

What are Some Ways to Mitigate Sequence of Returns Risk?

You can see how the sequence of your returns can affect your portfolio. The market is unpredictable and bottomless, so it’s important to try to shield yourself from, or at least mitigate the possibility of, taking those losses at the starting gate. But how can you do that when the market is completely out of your control? Well, you have a few options.

First and foremost, you can work with a financial professional to diversify your portfolio. While diversification can never guarantee any level of protection or growth, it may give you the ability to withstand dips in certain sectors of the market. It also spreads risk across different asset classes, or even different categories within the market itself. That can potentially help you avoid taking losses in your entire portfolio, even if one sector experiences headwinds.

For instance, non-correlated asset classes, which could include annuities or life insurance policies, might be a retirement diversification option for some people. Modern policy designs like fixed-indexed annuities and indexed universal life insurance policies are typically linked to a market index, while not actually participating in the market. These products can provide the upside of market gains while still protecting the principal, or the money used to fund the policy, in addition to locking in the gains.

These solutions may not match every consumer’s situation or financial objectives, however, so it’s important to speak to your advisor to explore policies and see if they make sense for your portfolio. For some people, annuities can provide a stream of retirement income that can cover lifestyle expenses, allowing retirees to leave their assets in the market during downturns rather than being forced to make withdrawals.

Be sure to speak with a financial professional who understands your circumstances, goals and tolerance for risk. The right partner can help you develop a custom withdrawal strategy and a plan to generate a reliable stream of income with your accumulated retirement assets. Your plan may include portfolio diversification, the establishment of a liquid emergency fund, the inclusion of alternative strategies and more, all with the intention of making your money last your entire life.

If you have any questions about how you can fight sequence of returns risk, give us a call today! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395. 

 

Trek Financial, LLC dba Trek Financial is an SEC registered investment adviser. Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. Any hypotheticals are for illustrative purposes only and are not to be construed as predictive of any specific outcome. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.

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Apr 19
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5 Things You Need to Know About Retirement

By | Retirement

Saving for retirement is important, but it’s also crucial to stay informed! Now that it’s Financial Literacy Month, we thought it would be the perfect time to discuss some things you need to know.

There’s an old saying that goes something like, “What you don’t know can’t hurt you.” You might have even used it, maybe when you came home past curfew without your parents finding out or poured your juice into the plant when no one was watching. And sure, no one being the wiser might have worked when you were young, but in retirement, what you don’t know actually COULD hurt you.

It’s important to stay informed about not just past trends, but also what you should expect as you make your way through that exciting phase of your life. It could give you a better chance to prepare for obstacles and implement a plan to overcome them. It could also help you take advantage of opportunities, especially as you look to make your money last for a quarter of a century or longer. Let’s go over five things you need to know about retirement.

  1. Market Downturns WILL Happen [1,2]

When you spend between 25 and 30 years or longer in retirement, it’s not a question of “if” you’ll encounter market downturn; it’s a question of “when.” These declines are typically referred to as “bear markets,” which are defined as market drops of 20% or more. If we use the S&P 500 as an indicator of bear markets, there have been 12 instances of significant market decline since the index’s inception in 1957. That means you should expect to face some adversity in the market once every five or six years. So, what are your options?

Well, historically, patience has been a way to overcome market adversity, as long-term outlooks have always trended upward. It can also be helpful to work with a financial professional who can tailor your portfolio to your goals and tolerance for risk. If you’re more comfortable with risk or have a longer timeline to retirement, you may have more assets invested in the market, whereas those approaching retirement may consider shifting more of the portfolio into assets that are fixed, like bonds or bond alternatives.

Rebalancing your portfolio and creating a customized retirement plan as you approach retirement is advised, especially to mitigate sequence of returns risk. Sequence of returns risk is the risk of retirees facing market downturn in the few years prior or the first few years of retirement. Again, working with a financial professional to find ways to mitigate sequence of returns risk can be helpful. Sometimes this is done by creating a stream of income with part of your retirement assets to cover your living expenses. This allows you to wait out bear markets with your remaining assets which might remain directly invested in the market.

  1. Decumulation is Just as Important as Accumulation

Yes, we all want to retire as multimillionaires, hitting on our investments and getting lucrative returns. That period of building your assets, investment and making growth-oriented decisions is often referred to as the “accumulation” phase. However, the fact is, it doesn’t matter how much money you accumulate if you don’t have a plan for how to spend it in the “decumulation” phase, after you retire and no longer have employment income coming in. Oftentimes, that plan includes a strategy to create income for your projected lifestyle, as well as a comprehensive budget dictating where that income will go. Additionally, many factors will play a role in decumulation, including taxation, legislation, your life expectancy, your spending habits and more.

We traditionally recommend getting a good idea of how much you plan to spend on an annual basis. That’s how much income you’ll likely need to create, along with a little bit of wiggle room giving you the freedom to cover emergencies or other unexpected expenses. The best way to do this is often by assessing your goals for retirement, then estimating the amount of money you’ll need to achieve them. Then, we can build a budget for you to strictly adhere to in retirement. It’s important to understand that if you start planning for retirement once you’re already there, it might be too late. If you’ve become accustomed to your lifestyle, it can be difficult to make cuts, especially when some retirees actually need more money in retirement than they did while they were working, leading us to our next point.

  1. It’s Never Too Early to Prepare [3,4,5]

Think about it. You reach the most exciting period of your life, your retirement accounts are as well-funded as they’ll ever be, and you have an endless list of things you want to do now that your time belongs entirely to you. Will you want to pull back? Not likely. That’s why it’s important to start preparing for retirement long before you call it a career, giving you the flexibility to course correct if you find that you haven’t saved enough to live comfortably. But how much do you need to live comfortably? Modern estimates say retirees have set that target figure at $1.3 million for a 67-year-old heading toward a 30-year retirement, but working with a financial professional may help you get a more accurate estimate for your unique situation. It might not require that much, depending on your plan.

A 2022 study found that the average person between the ages of 65 and 74 has saved a little over $600,000. Will that be enough? It depends. Working with a financial professional early in your career, developing your own personal retirement goals and consistently devoting a portion of your income to the recommended strategies in your plan may give you a better chance to reach the financial goals you have for your retirement.

  1. Social Security May Not Suffice [6,7]

Social Security figures to be one of the biggest sources of income for most American retirees. In fact, 40% of retirees rely on Social Security for more than half of their income, and 14% rely on it for 90% of their income or more. Sure, it’s a nice benefit, but it was never designed to be a primary source of funds in the first place. It was always a supplementary tool, originally created for the economic security of the elderly back in 1932, when the average life expectancy ranged from age 57 to 63. Now, relying on Social Security has never been more tenuous. Benefits are set to take a hit of more than 20% beginning in 2034 if no action is taken soon by Congress.

Still, action is where the problem lies. The choices appear to boil down to cutting payments for beneficiaries, raising the payroll tax rate or increasing the payroll tax increase limit. So far, all of those options have been met with opposition, presumably making benefits cuts the most likely solution. Granted, American taxpayers will always be contributing to the Social Security trust fund, meaning it’s unlikely the fund is drained completely, but it is running short, making it imperative to use other planning methods. Some of those methods can include saving more and creating more supplemental income streams to provide for your lifestyle.

  1. Risk Runs Rampant in Retirement [8,9,10]

Life expectancies continue to rise, which is fantastic news for anyone who plans to use their retirement years to check off bucket list items and spend time with their families. At the same time, it means spending more money, potentially for 20 years or longer. That can put you at risk of outliving your money, which is known as longevity risk. Then, even if you do save enough to provide for 20 to 30 years of a healthy retirement, you’ll start to introduce new factors that could drain your savings such as inflation, taxes, health care and long-term care risk.

Long-term care is one of the key factors that can quickly deplete your funds, and it’s easy to see why. On average, 70% of modern retirees will need some form of long-term care, and 20% will need it for five years or longer. Additionally, the annual median cost for long-term care can run from $64,000 to $116,000 per year, and it’s not covered by Medicare because it’s a lifestyle expense as opposed to a medical expense.

That could mean enlisting in the help of long-term care insurance, which is historically expensive and useless for the 30% who end up not needing the care. Modern policies, however, can combine life and long-term care insurance, providing a pool of resources for long-term care if necessary and a death benefit to beneficiaries if not. But these policies aren’t right for everyone. We can help you compare your options and determine if they match your goals.

If you have any questions about how you can better prepare for retirement, give us a call today! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395. 

 

Sources:

  1. https://www.forbes.com/advisor/investing/bear-market-history/
  2. https://www.investopedia.com/8-ways-to-survive-a-market-downturn-4773417
  3. https://www.wsj.com/buyside/personal-finance/how-much-do-i-need-to-retire-f3275fa7
  4. https://www.nerdwallet.com/article/investing/the-average-retirement-savings-by-age-and-why-you-need-more
  5. https://www.cnbc.com/2023/09/08/56percent-of-americans-say-theyre-not-on-track-to-comfortably-retire.html
  6. https://www.cbpp.org/research/social-security/key-principles-for-strengthening-social-security
  7. https://www.cnbc.com/select/will-social-security-run-out-heres-what-you-need-to-know/
  8. https://www.ssa.gov/oact/population/longevity.html
  9. https://www.aplaceformom.com/senior-living-data/articles/long-term-care-statistics
  10. https://www.genworth.com/aging-and-you/finances/cost-of-care

 

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Mar 27
0

Diversification, Patience, and Consistency

By | Financial Planning, Investments

Here are three important principles you may want to include in your investment philosophy.

Regardless of how the markets may perform, it’s important to stick to an investment strategy that aligns with your goals and aims to help you potentially benefit from favorable market conditions while also seeking to mitigate risks during less favorable periods, including the possibility of loss. That’s why we encourage you to consider making the following three principles part of your investment philosophy:

Diversification.

The saying “don’t put all your eggs in one basket” has some application to investing. Over time, certain asset classes may perform better than others. If your assets are mostly held in one kind of investment, you could find yourself under a bit of pressure if that asset class experiences some volatility.

Keep in mind that diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if an investment sees a decline in price.

Asset allocation strategies also are used in portfolio management. When financial professionals ask you questions about your goals, time horizon, and tolerance for risk, they are getting a better idea about what asset classes may be appropriate for your situation. But like diversification, asset allocation is an approach to help manage investment risk. It does not eliminate the risk of loss if an investment sees a decline in price.

Patience

Impatient investors can get too focused on the day-to-day doings of the financial markets. They can be looking for short-term opportunities rather than longer-term potential. Patient investors, on the other hand, understand that markets fluctuate, and they have built portfolios based on their time horizon, risk tolerance, and goals. A short-term focus may add stress and anxiety to your life, and it could lead to frustration with the investing process.

Consistency

Most people invest a little at a time, within their budget, and with regularity. They invest $50 or $100 or more per month in their retirement account or similar investments. They are investing on “autopilot” to help themselves attempt to build wealth over time.

Consistent investing does not protect against a loss in a declining market or guarantee a profit in a rising market. Consistent investing, sometimes referred to as dollar-cost averaging, is the process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for an extended period of time regardless of price.

Investors should evaluate their financial ability to continue making purchases through periods of declining and rising prices. The return and principal value of stock prices will fluctuate as market conditions change. Shares, when sold, may be worth more or less than their original cost.

To start crafting a custom investment strategy, give us a call today! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395. 

 

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