Believe it or not, 2020 is — finally! — over, and it’s almost time to file your taxes for this very strange year. Are you ready?

As you gather your paperwork to do your taxes, there’s some great news for Arizona residents: the state offers four big tax credits that you still have time to take advantage of. Each Arizona tax credit is tied to charitable giving, so you get to feel good about your contributions and save money on your taxes at the same time.

Here’s what you need to know to use these credits to lower your 2020 state tax bill.

Tax Credits Vs. Tax Deductions

For federal income taxes, you’re allowed to claim a tax deduction for charitable giving if you itemize deductions. For 2020, there’s also a special rule allowing you to deduct up to $300 of charitable contribution even if you don’t itemize. This was designed as an incentive for more people to support charities hurting during the pandemic. 

When you take a tax deduction for charitable giving, the amount you give is subtracted from your taxable income. This reduces the total amount of tax you owe. For example, if you donate $100 to Big Brothers Big Sisters and your total tax rate was 12%, you save a total of $12 on your tax bill. 

When you take a tax credit for charitable giving, the amount you give is subtracted from the total tax you owe. In this situation, that $100 donation will save you $100 on your tax bill. For Arizona residents who take advantage of special tax credits, that’s like getting some free money to give to charities: instead of paying it to the state government, you instead can choose to give it directly to a group whose work you believe in and want to support.

Rules for Claiming Arizona Tax Credits for Donations

There are four major tax credits that you can use to offset certain charitable donations in Arizona. For all of them, you have until April 15, 2021 — or until the date you file your return, if you do so early — to donate for the 2020 tax year. That means you can still donate and get the credit if you haven’t already!

To claim the credit, you’ll need to make sure donations go to a qualified organization. Each of the four credits has a maximum eligible amount as well. You can always give more, but your tax credit will be capped at the maximum.

Qualified Charitable Organization (QCO) Credit 

The QCO Credit is available for donations to qualified charities that serve the needs of low-income families struggling to fulfill their basic needs for food, shelter and healthcare. There are hundreds of Arizona-based organizations to choose from. 

Use this list to check eligibility and to find the QCO Code you’ll need to complete your tax forms. 

• Maximum Credit: $400 single/$800 married filing jointly
• Paperwork: Tax Credit Form 321

Qualified Foster Care Organization (QFCO) Credit

The QFCO Credit is very similar to the QCO credit, but is carved out specifically for charities that support children in foster care. The credit has more generous limits, but there are far fewer organizations that qualify. 

Use this list to check eligibility and to find the QFCO Code you’ll need to complete your tax forms. 

• Maximum Credit: $500 single/$1,000 married filing jointly
• Paperwork: Tax Credit Form 352

Private School Credit

The Private School Credit is available for donations to a Private School Tuition Organization. These groups provide scholarships for needy students to attend private schools in Arizona. This tax credit is actually two separate credits; the amount you donate will determine whether you need to apply for one or both credits when you file your taxes.

Use this list to check school eligibility. 

• Maximum Credit: $1,183 single/$2,365 married filing jointly
• Paperwork: Tax Credit Form 323 for the first $593 single/$1,186 married filing jointly; Tax Credit Form 348 for the next $590 single/$1,179 married filing jointly

Public School Credit

The Public School Credit is available for donations to Arizona public or charter schools in support of eligible activities and programs. It’s also available to families who have directly paid fees to a school for these activities.

Use this list to check school eligibility; use this webpage to see which activities and programs are eligible.

• Maximum Credit: $200 single/$400 married filing jointly
• Paperwork: Tax Credit Form 322 

The Bottom Line

Giving to charities is always worthwhile. It makes you feel good, and it helps people and organizations in need. And if you can earn a little reward for your efforts in the form of a tax credit, even better! As you plan for this year’s taxes, remember that it’s not too late to donate to an Arizona school or charity to take advantage of a tax credit for 2020. 

When it comes to retirement planning, one of the biggest choices you’ll face is whether to choose a traditional or a Roth IRA. They each have their own distinct advantages, but the right one for you will depend on your unique circumstances. 

Unhappy with your original choice? The good news is that you can convert a traditional IRA into a Roth. The bad news? It might be too costly to be worth it. Here’s what you need to know.   

Roth IRAs vs. Traditional IRAs

Before going any further, let’s review the basic difference between a traditional and a Roth IRA. Both of these individual retirement funds are tax advantaged to help you grow your nest egg faster than you would in a plain old brokerage account. The major difference is in when you realize the tax savings.

With a traditional IRA, your contributions are not taxed, which means you can deduct all the money you contribute from your income in that tax year. This can lower your taxable income and save you money upfront. The catch? You’ll pay taxes on the money when you take distributions during retirement. Once you start using the money, it will be taxed at your regular rate during retirement.

With a Roth IRA, your contributions are taxed along with the rest of your income each year — but you’ll never pay taxes on it again. The money grows tax-free until you need it at retirement, when you can enjoy tax-free distributions. 

Roth IRAs are obviously appealing to anyone who doesn’t want to worry about taxes in their retirement, but they have a few other advantages as well:

• Ability to withdraw contributions at any time: Because you already paid taxes on this money, you can withdraw the amount of your original contributions at any time without penalty, which can be handy in an emergency — even before the magic age of 59½.
• No required minimum distribution (RMD): While a traditional IRA forces you to start taking distributions by age 72, you can keep growing your money in a Roth IRA for as long as you like — good news for anyone who plans to live a long life!
• Tax-free inheritance for your heirs: If you die with money left in your Roth IRA, your heirs will also enjoy tax-free distributions, which they can take over a five-year period.  

What Is a Roth Conversion?

If you’re thinking to yourself that a Roth IRA sounds pretty great, you’re not alone. Many people want to make the switch from a traditional IRA to a Roth — if not for all, then for at least some of their retirement savings. 

This can be done via a Roth conversion. A Roth conversion transfers funds from your traditional IRA into a Roth. To do this, you’ll need to pay taxes on the money that you convert — taxes that will be charged at your regular income tax rate when your tax bill is due on April 15.

That sticking point can be enough to stop many people in their tracks, especially if they don’t have the cash on hand to pay that big tax bill. But for some, a Roth conversion is a good choice.

Is a Roth Conversion Right for You? 4 Questions to Ask Yourself

1. Will Your Future Tax Bracket Be Higher Than Your Current One?

This is the hardest question to answer, but getting it right is key. If you will be in a higher tax bracket when you retire than you were when you contributed to your IRA, a Roth IRA will save you money. But how can you know?

This takes careful planning, with research about your projected income over your lifetime and some honest answers about your potential for career growth. Most people earn more at the end of their careers than they do in the beginning, but how much will you need or want during your retirement? If your home is paid off and your children launched, you may be able to live nicely on less. But that means that a Roth IRA won’t save you any money at all, because you’ll have paid taxes at a higher rate back when you earned the money.

The other big unknown is the state of the tax code. Do you think taxes will go up in the future? If so, a Roth conversion can help you take advantage of today’s lower rates.  

2. Can You Afford the Conversion Taxes Today?

Remember, you will owe income taxes on the full amount of money you convert into a Roth IRA in the year you make the conversion. So if you’d like to convert $50,000, can you pay 22% of that in taxes — or even more, depending on your tax bracket? That can be a big chunk of change, and you’ll need it in liquid assets that you can tap into from another account. 

3. Do You Want to Pay the Taxes?

If your finances allow you to pay the taxes, think again: do you want to? What are your goals for opening a Roth IRA? If you have extra money lying around and aren’t worried about paying it to Uncle Sam, great. If you have debt, or are less certain about your future, converting to a Roth could be a gamble that’s not worth it. Even if you’re secure, you may find that traveling, charitable work, or even spending the money on your family now instead of building an inheritance vehicle feel like better uses of the money. Explore your feelings about the money as you work to crunch the numbers.

4. How Long Until You Need the Money for Retirement?

Roth rules require you to hold the account for five years until you make penalty-free withdrawals of the earnings, so plan carefully. Will you need this money before that period is up, or do you have time? If you plan to use the money right away, a conversion isn’t your best move. 

Still uncertain about whether converting to a Roth IRA is a good move? We’re here to help! We’ll walk you through your options, help you calculate your tax burden, and figure out how to structure a conversion if the numbers are in your favor. We can structure a partial conversion or spread it out over time to ensure that you can afford the taxes and don’t accidentally push yourself into a higher income bracket by mistake. Roth conversions are complex, so contact us today for expert guidance.

Retirement planning is tricky. On one hand, you want to make sure you save enough to enjoy yourself for a long, happy life once you stop working — and that could mean that you need decades of secure income. On the other hand, you also have dreams and obligations right now, and you need to balance your savings goals with real life.

Add to that all the moving parts of retirement planning — Social Security, stock market changes, inflation, and taxes — and you can be forgiven if your head is spinning.

But we’re here to help.

One important issue that many people don’t think about until it’s too late? The Social Security earnings test. Depending on when you choose to retire, your income could be limited. Here’s what you need to know to make the most of your social security payouts.

Social Security Basics

If you haven’t given much thought to Social Security, it’s worth taking a moment to remind yourself of what you’re entitled to. Social Security retirement benefits cover any American who has earned enough work credits by paying Social Security taxes for roughly 10 years over their lifetime. The amount of retirement benefits you can receive is based on a percentage of the total you’ve paid into the system over the years, though this amount varies depending on your age when you choose to retire and begin collecting.

You can begin receiving benefits as young as age 62, though this will result in a reduced monthly payout for the rest of your life. Full retirement age is anywhere from 66 to 67, depending on when you were born. And if you can wait even longer, your benefits will continue to increase until age 70. Your monthly benefit at age 70 could be nearly double what it is at age 62, so it’s important to use a Social Security calculator to understand how your retirement age will affect your income.

But What if You Keep Working?

For many people, working is a passion that they don’t intend to give up. For others, additional income in their sixties and seventies will be crucial to helping them meet their retirement goals. But choosing to work once you collect Social Security can impact your payments: Work too much, and your Social Security check could be much smaller than you anticipated, throwing a wrench into your retirement income and leaving you short on cash for living expenses.

The Social Security Earnings Test

To prevent people from depleting the Social Security system while still working, the law limits the benefits people are entitled to if they retire early — that is, before their full retirement age (whether that’s 66 or 67). So if you pick up an extra job after you reach full retirement age, you will still earn your full Social Security benefits on top of your extra earned income.

But if you choose to collect Social Security before your full retirement age, you’re subject to the earnings limit. Each year, the earnings limit rises to account for inflation. In 2020, the income limit is $18,240. This means that if you are not at the full retirement age, you can earn up to $18,240 and still get your full benefits. Go over that amount, and the SSA reduces your benefits.

The calculations for reduced benefits are complex. If you will not reach your full retirement age in 2020, and you earn more than $18,240, your benefits will be reduced by $1 for every $2 over the limit you go. If you will reach full retirement age in 2020, you’ll lose $1 for every $3 over the limit you go.

There is also a special rule about the year in which you retire: Your earnings test only begins in the months you have collected Social Security, so that all of your pre-retirement work income doesn’t count against you for the limit. For example, if you retire from a lucrative career in July and then take a part-time job in August, you can receive your full benefits as long as your monthly earnings aren’t more than 1/12 of $18,240 ($1520 per month).

Tips for Working Around the Earnings Penalty

If you’re confused, you’re certainly not the first! This is a complex formula, and it’s definitely a good idea to run a few scenarios on the Earnings Test calculator to see how excess earnings could affect your benefits.

There are also some tried-and-true tactics for avoiding a nasty surprise when you open your Social Security check:

1. Hold off on collecting Social Security until you reach full retirement age (FRA). This allows you to completely avoid the earnings test and any penalty, as it only applies to people below FRA.
2. Consider withdrawing your Social Security application. If you’ve already applied for benefits but have changed your mind now that you know more about the earnings limit, you can withdraw your application within 12 months of submission. You can apply for benefits again later — ideally when you’re closer to FRA.
3. Track your income carefully. If you want to —or have to — work, track your hours to try to stay within the earnings limit if you can. If you need to cut back near the end of the year to avoid going over the limit, it may make sense to do so.
4. Consider other retirement income instead of working. If you have investments that can replace the income from extra work before you reach FRA, it might make sense to use those instead. For example, you can pull principal from a Roth IRA with no penalty at any age.
5. Plan ahead! Working with an advisor who can run through every scenario will give you peace of mind and help you come up with a plan that maximizes your Social Security while preserving your retirement savings for the long haul.

Need help getting started? Weighing the pros and cons of working through retirement is a big question, and we’ve got answers. Contact us today to set up a consultation to get a clear view of your personal retirement plan.

For many people, thinking about retirement is a double-edged sword. On one hand, it’s exciting to contemplate the freedom that comes when you stop working for full time and can devote yourself to projects, travel or spending time with loved ones. On the other hand, retirement planning can be incredibly stressful — especially if you started to save later in life or are concerned that you won’t have enough income to live the life you’ve always dreamed of.

So how, exactly, should you plan your retirement income? There are four reliable strategies that work for most people. Understanding these income strategies is a good first step in laying out your future income so that you can live a worry-free retired life.

1. The Systematic Withdrawal Strategy

Systematic withdrawal is probably the most common retirement income strategy. After many years of depositing money into your retirement account, you finally begin to take it out again. This is, however, more complex than just adding and subtracting cash from a savings account.

When you add money to an IRA or 401(k), it is used to purchase a variety of investment products, including mutual funds, bonds, CDs, stocks, and more. Each of these items fluctuates in value over time. When you take money out of your retirement account, you end up selling off a portion of these investments, cashing out of your stocks and bonds.

As you do so, you’ll have a bit less principal in your account to continue earning money, so a systematic withdrawal strategy must take into account both how much money you need and also how many years you will need it for to ensure your income lasts.

Pros: Having a well-rounded portfolio lets you continue to earn money in the long term even as you begin to sell off stocks and other investments in retirement.

Cons: If the market goes down early in your retirement, it could have a significant impact on how much you can withdraw later.

Best for: Investors who can stomach some risk in the stock market even after they retire.

2. The Bucket Strategy

The bucket strategy for retirement income is also known as time segmentation. Instead of selling your investments equally across the board for income, you instead divide your investments into categories based on when you plan to use the money they generate. For example, if you plan to be retired for 30 years, you may have a near-term bucket designed to provide income for the first third of your retirement, a mid-range bucket for the next third, and a long-term investment bucket for the final third.

The near-term bucket is typically filled with lower-risk investments such as CDs, annuities, bonds or cash, which you don’t have to worry about during market fluctuations. Your longest-range bucket would be filled with riskier investments that have the potential to bring higher rewards over time. Since you won’t be using that money right away, you can weather the ups and downs more easily.

Of course, it’s still important to keep each bucket carefully diversified and to adjust for risk over time. As you enter your final third of retirement, you don’t want to keep all of your money in high-risk investments. Buckets need to be adjusted regularly to stick a careful balance.

Pros: Bucket strategies can help you better understand risk and take market fluctuations in stride.

Cons: There are a lot of moving parts, and you’ll need to pay attention and regularly adjust the buckets over time. This is not a set-it-and-forget it strategy.

Best for: Investors who are engaged in the process and want to feel in control of their risk.

3. The Income Portfolio Strategy

While the first two strategies involved selling off investments to generate income, the income portfolio instead relies on the investments to deliver earnings for you to live on. For example, if you had millions of dollars, you could simply place it in a savings account and live off of the interest without touching a dime of the principal.

Of course, there are other places to put your money than a savings account to deliver income. Creating a bond ladder is one way to create income over time. It’s also possible to buy CDs with staggered maturity dates so you reap the interest over time. Annuities and stocks that pay high dividends are other ways to ensure that you live off your earnings rather than selling your investments.

Pros: When you avoid selling investments, you may have a very stable foundation of money for peace of mind — and for your legacy to your heirs.

Cons: This strategy often requires a big nest egg to be successful.

Best for: Investors with low income needs during retirement and those who have been savings for decades.

4. The Essentials vs. Discretionary Strategy

The essentials vs. discretionary income strategy is also known as a flooring strategy. In this scenario, you carefully divide your wants from your needs during your retirement. The most important goal is to always have enough income for your needs: food, housing, utilities, taxes, health insurance, etc. Because these expenses are non-negotiable, the income you need to pay for them should come from a stable, low-risk source: social security payments would fall into this category, as would any guaranteed pension income, annuities, and bond ladders.

Once you’ve planned for your needs, the rest is the icing. You may plan to travel, indulge in sporting and entertainment, give regularly to charity, or pursue your passions. The funding for these activities comes from riskier investments like stocks or commodities, which will have greater fluctuations over time. The idea is that you can adjust your wants easily, enjoying yourself more in good economic times and tightening your belt in lean times.

Pros: This strategy helps balance risk and reward while providing basic security.

Cons: You need to be willing to deny yourself certain pleasures in an economic downturn.

Best for: People with a flexible outlook who are willing to roll with economic ups and downs.

Next Steps: Turning Your Retirement Savings Into Sustainable Income

If balancing all of these numbers on your own feel overwhelming, we can help. We are happy to assess your current portfolio, analyze your needs, and help you choose an income strategy that works for you. These are complex decisions with many moving parts, and we’re here to help you make sense of it all.

To learn more about maximizing your future retirement income, reach out to us any time for a consultation. We’re ready and waiting to help.

Losing a loved one is always difficult, and the death of a parent can be particularly unsettling. Many people describe the loss of their parents as being orphaned: No matter how old you are or how well established in your life, this major loss will lead you to reevaluate your place in the world.

In addition to strong feelings of grief, losing a parent also means dealing with a mountain of paperwork. As an heir to their estate, you’ll be left to sort out their finances, put their affairs in order, and complete any final wishes about the things they’ve left behind.

From requesting death certificates to preparing a final tax return, there’s a lot to keep track of — it’s completely natural to feel overwhelmed. To help you sort through all the paperwork and keep things organized, we’ve put together this checklist to walk you through the major steps of handling your parent’s finances.

Get Copies of the Will

It’s best to have the will as early as possible, especially if there are instructions about funeral arrangements included in it. This will help you planning your parent’s final resting place and will be necessary for appropriately dividing the estate among heirs in the coming weeks and months.

Gather Identifying Documents

As you deal with various financial entities, you’ll need to prove your parent’s identity. To do this, you will need:

• Birth certificates (for your parent and their children)
• Social Security cards
• Marriage certificates
• Divorce paperwork
• Military discharge papers

You may need some or all of these identifying documents for your other deceased parent and any of your parent’s heirs as well.

Get Copies of the Death Certificate

Most people are surprised at how many copies they will need of the death certificate to send to various financial institutions. Many experts recommend ordering up to 20 copies so you’ll have what you need and avoid the hassle of having to order more. You can usually order these from the funeral director or from your local Board of Health.

Inform Your Parent’s Employer

If your parent was still working, contact human resources to inform them of their death. Ask for information about benefits, which may include additional life insurance, health insurance, and retirement plan information.

Inform the Social Security Office

If your parent received Social Security, you’ll need to call to let them know your parent has died. They can help you switch payments to a surviving spouse if necessary and let you know if you or anyone else is eligible for a death benefit.

Inform the Veteran’s Administration

If your parent was a veteran, the VA may offer special funeral arrangements and other benefits, including survivor benefits.

Start the Probate Process

Having your parent’s will is only the first step to dividing their estate. Though a surviving spouse will typically get everything upon the death of one parent, when both are gone, you’ll have to go through probate court to authenticate the will and officially divide the estate’s assets. Each state has different rules and regulations, so working with a lawyer is a good idea.

Tip: If you are named the executor of the estate in the will, keep receipts for your related expenses so you can be reimbursed from the estate.

Settle a Living Trust

If your parent created a living trust instead of a will, you will be able to avoid probate court to divide the assets. Instead, the designated trustee (which could be you, a relative, or a third party) will settle the estate. This involves gathering all the trust’s assets, paying off any bills or debts, and dividing what’s left among the named beneficiaries of the trust.

Gather Financial Paperwork

To resolve your parent’s finances—whether they had a will or a trust—you’ll need information on all their accounts. These may include:

• Bank accounts, such as checking and savings accounts
• IRAs
• Pension account information
• 401(k) or 403(b) retirement plans
• Annuities
• Brokerage investment accounts
• Life insurance policies
• Deeds for other property and assets, such

You’ll also need to gather information about accounts to which they owe money. These may include:

• Tax returns
• Mortgage statements
• Other loans, including student loans, home equity lines of credit, car loans, etc.
• Utility bills for items like cable, electricity, gas or fuel oil, etc.
• Credit card statements

Tip: If you aren’t sure that you know about all of your parent’s accounts, check their mail for the next three to six months to intercept bills and paperwork. You may find it easier to have their mail forwarded to you for convenience.

File a Final Tax Return With the IRS

You will need to file a final tax return for your deceased parent. Keep all of the paperwork you’ve gathered handy for filling that next April, and be on the lookout for W-2 forms and any final tax documents as they become available in January so you can file accurately.

Make Necessary Cancellations

Use the paperwork you’ve gathered as a guide to help you cancel accounts that are no longer necessary. These may include:

• Credit cards
• Lines of credit
• Health insurance
• Auto insurance
• Voter registration
• Memberships to clubs, subscriptions, etc.
• Driver’s license
• Email, social media, and other online accounts

Change or Close Accounts

If you have a surviving parent, you may need to transfer utility bills, mortgage accounts, and other property, assets and bills into their name. Review the financial documents to determine which payments still need to be made and arrange for them to be paid without interruption.

If you do not have a surviving parent, learn how to close accounts that are no longer needed and how to set up payment for debts that must be cleared.

File Claims for Benefits

You’ll need to file a claim to receive life insurance benefits if your parent had a policy. Likewise, you may be eligible for benefits from their retirement accounts, depending on their designated beneficiaries. A professional financial planner can help you file these claims and make the most of these benefits.

Get Professional Help

Depending on the complexity of your parent’s finances, dealing with their final affairs can be a major challenge. A good probate lawyer and knowledgeable financial planner will help you sort through the details and ensure that you don’t miss anything as you complete this process. They will also advocate for you as you work through this difficult process.

If you need help getting your own finances in order, we can help. Reach out any time for advice on how to handle your finances and plan your estate — a gift of peace of mind for yourself and your future heirs in their time of need.

You may not be able to turn back the clock to open your own retirement accounts earlier, but you can set your children and grandchildren up for success with a Roth IRA for kids. Here’s what you need to know.

Compound Interest: Time Is on Your Side

When you invest your money over a longer period of time, you’ll see exponential growth by the time you’re ready to retire—and that’s all courtesy of the magic of compound interest. For a snapshot of its power, think about a $100 per month investment that you make for 50 years. Sitting in a checking account earning no interest at all, you’d have $60,000 at the end of your investment period.

If you earn compound interest on that amount—meaning that every year you earn 5% interest the amount you have saved so far—you’ll earn interest on your interest as well as your principal savings, and your total will skyrocket. With a 5% average annual return compounded annually on our little $100-a-month account, you’d have over $250,000 after 50 years.  At a 10% average annual return you would have nearly $1,400,000 after 50 year investing just $100-a-month.

It pays to start early.

Roth IRAs for Children: Tax Free Investing

To get your children or grandchildren started early on investing, you can open a custodial Roth IRA. As the custodian, you will control this account on their behalf until they reach adulthood.

A Roth IRA is ideal for children because of the way its tax advantages are structured. With a Roth, your child contributes post-tax income to the account, up to a maximum of $6,000 per year.

But here’s the thing: Kids don’t earn much money, so they’re unlikely to owe any taxes on their earnings anyway. Dependents are subject to a reduced standard deduction, but it’s still more than $6,000—which means they can max out their Roth IRAs without paying taxes on any of that income.

Ever.

Because the earnings on a Roth IRA are tax-free, your child can reap the benefits of decades of compound interest without ever paying taxes on that money. They won’t be taxed on what goes in, and they won’t be taxed when they take distributions later. 

Important Roth Rules for Kids

Like adults, kids must have earned income to contribute to a Roth IRA. For teens, this can be from standard life guarding and burger flipping W-2 jobs. Earned income can also be in the form of money earned for odd jobs like tutoring, babysitting, or even operating a lemonade stand. The key is to make sure you track income from these odd jobs by keeping receipts or a log so you can prove your child actually earned the money—it can’t be a gift from you.

Your child can invest 100% of their earnings up to the maximum of $6,000 per year. If you want to let them keep their money and “give” them the cash to invest in the Roth yourself, that’s fine. As long as the total in the account doesn’t exceed their earnings, the IRS won’t care.

Looking for a great Roth IRA for your kids or grandkids? We’re here to help with all your investment needs, so contact us today. 

There’s never been a better time to make sure your finances are in order.

It’s stating the obvious, but we are now all living through a period in history none of us will ever forget — “uncertain times,” indeed. The impact on our families, communities, and the country as whole has been, and will continue to be, profound. It’s a scary time, but there’s one important piece of advice that can see you through the worst:

Focus on the things you can control.

As the old saying goes, “When life gives you lemons, make lemonade.” Today’s economy is a real lemon, but obsessively watching the news and the state of the stock market isn’t going to help. Instead, take a look at what you do have and make the absolute most of it. In this way, you’ll be squeezing maximum value out of your personal finances and positioning yourself for a better tomorrow.

Here is a checklist of action items that you can fine-tune before life speeds back up again. If you’ve never thought about some of these points, that’s okay. Now is the perfect time to get started.

Estate Planning

Most people do this once and forget about it for decades, but your estate planning needs change just as you grow and change over the years. Make sure your current plans still meet your needs.

• Review Your Beneficiaries. This includes your investment accounts, retirement accounts and pensions, bank accounts, and life insurance. Make sure your beneficiary choice and contact information is up to date.
• Review Your Documents. This includes your Last Will and Testament, Power of Attorney, Living Will and perhaps a Living Trust. Are they up to date? If you need to get started on any of these, we can provide resources for you.
• Inform Your Loved Ones. Should something happen to you, do your loved ones know what to do? Where to find your documents? Who to contact? Create a document and provide both digital and hard copies of this important information.

Insurance

If your insurance auto-renews each year, you might not have the correct coverage for your current needs. You also might be overpaying!

• Review Your Coverage. Is your homeowners insurance sufficient? Should you still be carrying collision coverage on an older vehicle? Do you have enough cash on hand to raise your deductible and enjoy premium savings? Ask for new quotes to see how these changes affect your bottom line. This is also a great time to ask for discounts.
• Record Your Belongings. Take pictures or video of your valuables to provide to the insurance company if they are stolen or destroyed. It’s the best way to streamline a claim and make sure you get what you’re entitled to.
• Consider an Umbrella Policy. This extra liability insurance is typically a great value when it comes to protecting yourself from a lawsuit that could ruin you.
• Recalculate Your Life Insurance Needs. Do you have the right amount of life insurance to protect your family? Try a simple calculator to see how much you need, or get in touch for help.

Budgeting

When’s the last time you reviewed your monthly budget? Of course, you don’t want to use the last 30 days of spending as a guide, since many normal spending habits have been forced to change as we practice social distancing.

• Use 2019 Numbers. This will help you get a more accurate view of your typical income and spending. By looking at real numbers, you can see how much you actually spend in different categories and make some adjustments if needed.
• Review Your Auto-Pay Expenses. It’s so easy to forget about old subscriptions and services we no longer need — but that we still pay for via auto deduction. Cancel these budget vampires and breathe a sigh of relief.

Taxes

Recent tax law and IRS rule changes mean that you might be missing out on some savings.

• Consider Converting to a Roth IRA. With many IRAs being down in value, converting a Traditional IRA to a tax-free growth Roth IRA may save money on taxes. We’re happy to discuss your options to help you make the most of your retirement.
• Set Up IRA Contributions: See if you can increase your contributions to maximize your savings. If you didn’t make 2019 IRA contributions, you can still do so until July 15, thanks to a COVID-related IRS extension.
• Explore Charitable Giving: The CARES Act has expanded deductions for charitable giving this year, so it’s a great time to help worthy organizations. Qualified Charitable Contributions (QCDs) can help you to support causes you believe in using required minimum distributions from retirement accounts.

General Maintenance

With extra time on your hands, it also makes sense to do some general financial housekeeping to make it easier to review your paperwork in the future.

• Update Your Financial Dashboard. If you’re using personal finance software, be sure you’re linked to all your current accounts for accurate tracking and budgeting.
• Trash Old Documents. Be sure to shred those papers to protect sensitive personal information and account numbers.
• Organize Your Financial Files. Get those tax returns, insurance policies, and more into neatly labeled folders for ease of use later.
• Scan and Save Important Documents. If you don’t already have digital versions of your paperwork, take the time to scan them and create a digital filing cabinet now.

Some thoughts about planning for the future.

With your financial life organized and streamlined, you should feel much better about things. You have all of your information at your fingertips, and that makes it easier than ever to make some smart choices about the future.

If you’d like to talk about your investment options and financial planning needs, we’re always here to help. We know it’s a stressful time, and we pledge to do our best to provide clarity, transparency, and advice that will help you make your best moves in these difficult times.

Please reach out if you’d like more help with financial planning — we’ll be standing by!

In the meantime, stay healthy, safe and sane — and try to enjoy the lemonade you’ve worked to create out of this situation.

For long-term investors, it’s important to focus on tried-and-true disciplines that have worked over time more than what the stock market is currently doing or what the talking heads predict the market will do.  Rebalancing is one such discipline that can potentially reduce risk and increase long term performance, and may also help reduce some of the worry that accompanies times of increased market volatility.

What is Rebalancing?

Rebalancing is the process of realigning the weightings of a portfolio to get back to a target asset allocation.  It involves periodically buying assets that have decreased in value and selling assets that have increased in value.  This discipline is intended to cause investors to buy low and sell high with the goal of maintaining an original desired level of asset allocation.

The figure below shows a target allocation with equal weighting into four different Asset Classes.  If any one asset class moves above or below a predetermined percentage (ex. 3%, 5%, 10%) of its target allocations, it’s time to rebalance.

It May Feel Counterintuitive to Buy Low and Sell High

In times of market uncertainty and poor investment performance, selling better performing assets and buying more of the underperforming assets in your portfolio may seem counterintuitive. However, market corrections and deep bear markets represent rebalancing opportunities to increase ownership into positions that have experienced a significant drop in price. For example, if you were happy to buy an investment at a particular price but then the price drops 15%, 20% or more, your first instinct might be to stop the bleeding and sell.  However, if you do that you’ve now locked in your loss. Setting up rules for when to rebalance before the market declines may save you from making the typical investor mistake of buying high and selling low.

When to Rebalance?

There is no “perfect” time to rebalance.  If you want to take a disciplined approach that removes emotion, consider rebalancing every time your IRA, 401k, TSP or other investment account drops or increases in increments of 3%, 5% or 10% in value.  The percentage you select isn’t as important as committing to rebalancing when your reach the threshold. A variation of this method is to rebalance anytime one or more of the funds is 3% or greater outside of it’s target allocation.  Alternatively, you can use one of the broad market indexes as an indicator of a good time to rebalance.  Hypothetically if the S&P 500 drops 10%, you should see this as a time to buy low and sell high instead of panicking.  Buy shares of investments when they are down so you will have more ownership if the investment recovers.

The figure below shows an example of when to rebalance and take advantage while others may be panicking and making mistakes.

Simple and Actionable

Imagine how empowering it would be to have a simple, actionable plan in place if the stock market drops 10%, 15%, 20% or more that could actually help your investments long term.  Consider letting your portfolio tell you when to take action and rebalance, not a media personality whose primary job may be to keep you afraid and tuned in for higher ratings.

Next Steps

1. Establish the appropriate asset allocation for your personal risk tolerance and time horizon (when you need to use the money).
2. Rebalance (buy low, sell high) your asset allocation established using one of the methods mentioned above.
3. Update step one every few years.

Good luck!

Rebalancing is a strategy that can’t guarantee against a loss or better portfolio performance and could result from missing out on additional gains from appreciated assets. This is not intended to be financial advice.  Please consult an investment professional on any strategy or your individual situation. Examples are for illustrative purposes only. Past Performance doesn’t guarantee future results.

There’s great comfort in knowing you can weather the most common “financial emergencies” like a new transmission for your car, a trip to the emergency room and even the dreaded AC unit replacement.  It’s important to have an emergency fund in place, but what’s considered a viable amount and how long does it take to build? Can it be done in a year or less? The short answer is with some work, yes.

First Things, First

Before rolling back your sleeves and building an emergency fund, make sure you address any outstanding credit card balances first.  Dave Ramsey suggests setting aside $1,000 into your savings first to give some breathing room, then paying off credit cards so you can start building your full emergency fund.

Another potential misstep would be calling your emergency fund a zero balance credit card or HELOC (Home Equity Line of Credit).  Many folks use this approach because they don’t want their savings earning close to zero interest. I don’t recommend this for two reasons.  First, the last thing you want to do (if faced with a financial emergency) is to add fuel to the fire by adding debt. Second, you shouldn’t be overly concerned with growth or how much interest you’re earning with money you may need to spend within 36 months.  You just need to know the money will not lose value and be accessible.

Establish the Right Amount

The tried-and-true way to establish an emergency fund is having three to six months of spendable income in place.  For example, if you are paid bi-weekly, take your direct deposit amount and multiply it by 6 (3 months) or 12 (6 months) and that’s the target number to have in your emergency fund.  I recommend closer to 6 months for an added sense of security – better to have it and not need it than to need it and not have it.

Here are five practical ways to build your emergency fund within a year.  They can be used individually or combined with each other to establish your emergency fund.

1. Set Up An Allotment from Your Paycheck 

If you’re paid in a regular frequency (bi-weekly or monthly), this is a simple and effective way to reach your savings goal.  For example, let’s say you want $9,000 in your emergency fund in one year. If you’re paid bi-weekly, you have 26 pay periods every year: $9,000 / 26 = $346 allotment every paycheck.

This strategy requires two disciplines.  The first is to set up your emergency fund at a financial institution other than the one you have your primary checking account.  This removes the temptation – out of sight, out of mind.  The second is to not overdo it.  This plan will backfire if you get too ambitious and set up an allotment for an amount that is not sustainable.  If you can’t hit your twelve month goal, then adjust the timeframe or implement other strategies.

2. Sell Your Stuff

This one is pretty self-explanatory, but it’s also easier said than done.  It’s a challenge to let go of stuff we never use – we get sentimental or rationalize unlikely scenarios where something may come in handy.  A good rule of thumb is if you haven’t used it in the last year, you are not likely to use it again. Earn some extra cash and sell your stuff to someone who needs it more.

3. Reduce Retirement Account Contributions (401(k) / TSP / IRA 403(b) / 457)

This one tends to raise some eyebrows and cause controversy, but temporarily reducing your 401(k) or other retirement account contributions for the sake of building your emergency fund may be the right approach.  Once the money enters into your retirement account, there could be penalties for accessing the funds should you get into a financial pinch. If you have a company match, you may want to consider contributing the minimum amount to receive the match. Prioritize the emergency fund first.

4. Tighten Up Your Budget

If you honestly track your spending for 30 days, you will likely find one or two spends that cause you to be a little upset with yourself.  Commonly eating out is one of the usual suspects. Amazon is also a frequent offender. Look over what you’re spending and adjust accordingly – it’s that simple.  I like to see what percentage each category of spending represents (insurance: 8%, eating out: 5%, mortgage: 25%, etc.). Give it a try, the results may surprise you.

5. Get a Side Job

I realize this strategy may not initially get you excited, but keep in mind this is a temporary means to an end.  The good news is there are so many opportunities today to pick up a side job with flexible hours. Rideshare companies like Lyft and Uber are just one of many ways to generate some extra income with flexible hours.  Get creative, and have fun with it.

When you hit your emergency fund goal, you can go back to your retirement account funding – ideally 15% or more.  Don’t forget all the lessons learned from reviewing your budget and spending. Keep the unnecessary spending down.  Should an emergency occur and you have to tap into your savings, you want to be well-prepared to replenish your emergency fund.  Good luck!

If you’d like to discuss your emergency fund options with us, book a call using this link and we’ll be in contact with you shortly.

The idea of retiring in your 50’s as opposed to your 60’s appeals to many Americans, and for good reason. Why postpone the good life, right? However, if you are serious about retiring early, you need to plan in advance and make sacrifices many years ahead of time.

Here are 8 areas to consider if your serious about retiring in your 50’s:

1. Free Time

Many folks welcome any free time they can get, yet don’t consider how to manage it once they retire. It’s important not to dismiss the notion of being bored in retirement. Think about your social circle (spouse, friends, colleagues, etc.) who may still be in the workforce. Your schedules could potentially look very different once you retire, leaving you with a lot of free time you may not be used to.

Before retiring, think about things you’d like to do on your own – volunteer in the community, hike local trails, try a new workout class, etc. Ideally these new activities won’t cost you a lot of money, and might even give you the chance to earn some “fun money”. Consider the costs involved with how you spend your new free time, but most importantly, make sure these new activities give you purpose when you wake up in the morning. This is your chance to get creative, so have fun with it!

2. Debt

Becoming debt free should be a priority at any stage in life, especially if you want to retire in your 50’s. If you’re aiming to retire early, rid yourself of any consumer debt like credit cards and auto loans. Of course, paying off your mortgage is a major plus, but it may not be realistic for everyone. Regardless if you own or rent, prioritize keeping your housing related expenses manageable that way you increase your cash flow. By eliminating debt service payments (expense), you will fund your retirement accounts (income). If you’re serious about retiring in your 50’s, get aggressive about eliminating consumer debt.

3. Expenses

Retirement expenses are directly tied to your debt and how you spend your time. As you begin to plan for retirement, it’s important to be transparent when it comes to your expenses. All too often people don’t take an honest account of how much discretionary spending they do – eating out, entertainment, travel, etc. – and it throws off their projected retirement expenses.

You can safely expect to spend an extra 10% – 15% over your planned budget for the first couple years of retirement. This gets you ahead of the game and provides a buffer if you need it. The last thing you want to do is retire, only to come to the realization that you’ve significantly miscalculated your discretionary budget. It’s better to be upfront and honest about your spending habits before retirement than have to adjust later once you’re retired.

4. Cash Reserves

The need for adequate cash reserves is never more important then it is in retirement. Life is always throwing curve balls our way and that does not change in retirement. In my experience, the better you prepare, the less likely emergencies strike. Beef up your cash position and plan for any large purchases. A general rule of thumb is 3 to 6 months of expenses, but in retirement I would certainly lean toward 6 months.

If you have trouble saving up your emergency fund, consider setting up an allotment from your paycheck to a bank separate from where you have your primary checking account. Out of sight out of mind. Last minute weekend getaway or new patio furniture: not an emergency.  Roof fails or air conditioning unit dies in July: emergency.

5. Retirement Savings

Most Americans have a large portion of their money in retirement accounts – 401(k)s, IRAs, 403(b)s, TSPs, 457, etc. These accounts are ideal for retirement savings due to tax benefits. However, keep in mind most employer-sponsored retirement plans have early withdrawal penalties prior to age 55. IRAs and Roth IRAs have penalties for withdrawals prior to age 59.5.

As you approach retirement, do your research on different retirement account options. There’s a 72(t) early withdrawal provision that allows substantially equal periodic payments from a retirement account as long as the distributions last until age 59.5 or 5 years, whichever is longer. You can also fund a non-retirement brokerage account early and often. These types of accounts allow you to investment in the same way you can in retirement accounts without early withdrawal penalties. Explore the pros and cons of each, it’s best to know all your options.

6. Social Security

The earliest you can start collecting Social Security is age 62, so there’s really no need to factor it in. However, if you are planning on earning income in retirement, you’ll want to be aware of the social security earnings test. In 2018, Social Security will withhold $1 in benefits for every $2 of earnings in excess of $17,040. This applies in years before the year of attaining NRA (Normal Retirement Age).

If you are in your 30’s or early 40’s, you may not want to factor Social Security income into your retirement plan at all. Not because you won’t receive Social Security (although a lot can change in 15-25 years), but it’s always better to be over-prepared than under-prepared.

7. Withdrawal Rates

If you’re planning to take income from your investment portfolio when you retire, you’ll want to be sure you’re taking it at a sustainable withdrawal rate. The money will need to last you 30, possibly 40+ years. If you are starting income distributions from your investment portfolio in your 50’s, you’ll want to avoid anything higher than a 3% – 4% withdrawal. Play around with the numbers to make sure your withdrawal rate is sustainable for retiring in your 50’s. The last thing you want to do is outlive your money.

8. Health Insurance

Medicare starts at age 65, so if your employer does not offer you the ability to continue health benefits into retirement, you’ll need to factor in the cost of increased health care costs between retirement and age 65. Do your research and plan on the costs increasing between now and retirement. If you have a spouse and they have coverage through their employer, consider switching to their policy.

Be sure to periodically reassess your goals. You may have set a goal years ago that has lost its luster today. If you always had the goal of retiring in your 50’s, for example, but find fulfillment in your work, don’t hold yourself to a goal you made years ago. I’ve seen folks retire because they’ve romanticized the idea of retirement for so long, only to end up regretting the decision. It’s okay if your goals change, just make sure they align with the season of life you’re in.

Retiring in your 50’s is absolutely doable, but requires planning and smart changes to your personal finances now. As a part of the workforce, you’re trading your time for money. However, once you retire, this is no longer necessary to meet your lifestyle. That doesn’t mean you shouldn’t work or do income-producing activities. In fact, if you can have fun, meet new people, or follow a passion while generating income, that’s an added bonus. However, if after running the numbers you know you’ll have to work in retirement, take a step back and reevaluate your situation. It might be a good idea to get an unbiased opinion from a financial planner to look at your situation.

If you’d like to discuss your options with us, book a call using this link and we’ll be in contact with you shortly.