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Jun 12
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Annuity Sales Are Surging. Do You Know What They Are?

By Retirement Planning

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.

One recent study revealed that only 9% of consumers say they feel very knowledgeable about annuities, 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.

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.

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. Wade Pfau and 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, and because some annuities may perform better than stock market investments for retirees.

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 can’t be sold by an investment advisor, they have to be through a Series 6 or Series 7 licensed, registered representative who is affiliated with a broker/dealer. (NOTE: A registered representative might sometimes be a dual-licensed broker/dealer.) There are a few companies who are now offering annuities that are fee based and do not pay commissions; however, the list is very small.

Variable annuities are considered highest risk because growth is based on market performance and the annual fees tend to be very high, especially if the client purchases a rider as one of the annuity features.

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 Drew Capital Group in Tampa at 813.820.0069.

 

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:

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

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

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

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

 

NOTE: Annual fees can be high with any type of annuity. Please check with your financial professional to examine fees before purchasing.

Fixed Annuity: A fixed annuity is for retirement or other long-term financial needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not participate in any stock or equity investment or index. Guarantees are based on the claims paying ability of the issuing company.

Indexed Annuity: An indexed annuity is for retirement or other long-term financial needs.  It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. Guarantees provided by annuities are subject to the financial strength of the issuing company and not guaranteed by any bank or the FDIC.

Indexed annuities do not directly participate in any stock or equity investment.  Clients who purchase indexed annuities are not directly investing in the financial market. Market indices may not include dividends paid on the underlying stocks and therefore may not reflect the total return of the underlying stocks; neither a market index nor any indexed annuity is comparable to a direct investment in the financial markets.

Variable Annuity: Variable annuities are offered only by prospectus. Carefully consider the investment objectives, risks, charges, and expenses of variable annuities before investing. This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing. Guarantees are based upon the claims paying ability of the issuer.

If a registered representative (IAR, investment adviser representative) is dual-licensed and is also a registered rep with a broker/dealer, variable annuity advertising may need to be filed with FINRA through their broker/dealer.

Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks, and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59† unless an exception to the tax is met.

May 30
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What is Sequence of Returns Risk?

By Retirement Planning

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!

 

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment decisions, or any changes to your retirement or estate plans. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

 

Feb 23
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6 Financial Tips for Couples

By Financial Planning

Money can be a major obstacle for couples. Here are a few ways to overcome it.

Do you remember when you first met your partner? So many things about them might have captivated you. Maybe it was their eyes, their hair or their smile. Maybe you started talking and you fell in love with their outlook on life, their fun-loving attitude or their sense of humor. We’re willing to bet, however, it wasn’t your aligned financial philosophies that initially drew you to each other, even if financial stability was high on your list of priorities for potential partners.

At the same time, maybe that should be something you look for in your other half. Nearly 50% of Americans say they argue with their significant other about money, while 41% of Gen Xers and 29% of baby boomers attribute their divorce to financial disagreements [1]. One of our goals is to give you the stability that can eliminate financial stress, trimming your worries when it comes to your happily ever after. Here are six tips for couples looking to achieve their financial goals together!

  1. Communicate Effectively

Of course, communication is the key to a healthy relationship. It’s no secret. In fact, you’ve probably heard this old adage your entire life, but hearing it is different from comprehending it and acting upon it. Additionally, while it’s important when sharing your needs and overcoming conflict, it’s just as important to have open, honest, confident communication about your finances. In our experience, the majority of the battle is normalizing the conversation. Remember, you’re not just combining finances; you’re combining your entire lives, so this discussion shouldn’t be taboo. To make it easier, it can be a good idea to start with simple topics. Go over things like income, how you feel about different retirement accounts, your experience investing or how comfortable you feel with risk. You can then let the conversation naturally evolve to encompass more complex topics, or you can tackle new problems as they arise. It’s key to consider that you’re equal partners, both in life and in money, and it’s crucial to have these discussions before and during a serious relationship.

  1. Choose a Strategy

Once you’ve broken the barrier to financial discussion, it can be helpful to choose a strategy for how you’ll combine your finances. Some couples, for example, find it easiest to simply combine all their assets, giving meaning to the phrase, “What’s mine is yours.” Others, however, may feel more comfortable keeping their assets separate and handling their own personal expenses. Most commonly, a couple will land somewhere in the middle with a few select combined accounts and some solo accounts. This can help each person maintain some of their individuality and independence while also offering some guidance as to who’s responsible for different financial obligations. Spend some time discussing these options with your partner, and be completely open and honest to foster healthy communication in the present and future.

  1. Set Measurable, Realistic Goals

Identify goals that are important to both of you, especially if you want to achieve them together. Whether those are short- term goals or long-term, this gives you something to work toward, unifying your vision and objectives to keep you on the same page. It can also help you maintain control over your financial decisions and your priorities. Ensuring those goals are measurable and realistic is also important. In addition to the satisfaction that comes with watching yourself climb toward your objectives, reaching measurable milestones can be motivating, pushing you and your partner to continue saving and spending with the future in mind.

  1. Budget Effectively

As a couple, you’re a team. That means working together to reach common goals. There’s also power in finding financial strength together, so constructing a budget, controlling your spending, and expressing your thoughts freely can help you grow as a duo. When building that budget, it’s important to start by having a conversation about your priorities. Lay them out clearly, and work together to determine which expenses are “needs” and which expenses are “wants.” You’ll probably want to prioritize essentials, like food, your home, your transportation, and other necessary living expenses. You may want to move on to outstanding debt, determining how much you can realistically pay down in a given period. As partners, you should also hold each other accountable, knowing that sticking to the budget is what’s better for both. Then, know you can tweak your budget as your circumstances change and evolve.

  1. Choose the Right Financial Partner

The right financial partner or professional can help you develop and work toward your goals. Oftentimes, this means finding someone who understands your current circumstances, is able to read you and your partner as people, and is willing to work in your best interests. This can be tricky, but remember, this is your livelihood we’re talking about. It’s more than understandable if you’re skeptical when choosing someone to control your assets. Additionally, if you think it’s the right time to start working with a professional, ask many questions to determine if they’re the right person to help you achieve your goals. While you may feel like you’re on the hot seat as they ask about your saving and spending, it’s just as much of an opportunity for you to assess how effective or helpful they will be in the construction of your plan or portfolio.

  1. Develop an Actionable Plan

Once you understand your cashflow, habits, budget and goals as a couple, it’s time to develop a plan that offers specific direction and sets you into motion. Oftentimes, this is the blueprint for your future, giving both you and your partner rules to adhere to. It should also be comprehensive, meaning that it accounts for each aspect of your life. Determine how you’ll utilize specific retirement accounts, as well as if you’re comfortable having your money exposed to market risk. You can also explore options for insurance policies, which can be crucial if you want to protect your loved ones in the event of the worst. Furthermore, revisit your plan on a regular basis. Maybe your risk tolerance has changed, you feel you can contribute more to your savings vehicles, your beneficiaries have changed, you need different levels of insurance coverage, or you’re ready to graduate into retirement. Your plan plays a key role in achieving both your short- and long-term goals, and having one that you believe in can make all the difference.

We believe that money should never hinder your relationship. If you have any questions about how you can effectively combine and develop a plan for your finances as a couple, give us a call today!

 

Sources:

  1. https://www.marketwatch.com/story/this-common-behavior-is-the-no-1-predictor-of-whether-youll-get-divorced-2018-01-10
Jan 29
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5 Things You Should Know if You’re Retiring in 2024

By Retirement, Retirement Planning

Heads up! If you plan to retire this year, you should know these five things.

Are you planning to enter the most exciting phase of your life in 2024? A phase where you get to do what you want to do, not what you have to do? With the right planning and preparation, it’s possible, but you should be aware of the year-over-year changes that occur for retirees, especially if this is your first year. Here are five changes you should know about if you plan on entering retirement in 2024.

  1. Higher Income Tax Brackets [1,2]

Traditionally, tax brackets rise with inflation on an annual basis, and 2024 is no different. For instance, the top end of the 0% capital gains bracket is up from $44,625 to $47,025 for single filers and from $89,250 to $94,050 for those who are married and filing jointly. Retirees who expect to withdraw from accounts subject to income tax—like traditional 401(k)s—may also expect to see a bit more relief this year in their income. See below for 2024’s ordinary income tax brackets.

Rate (%) Filing Single Married Filing Jointly Married Filing Separately Head of Household
10% $0 to

$11,600

 $0 to

$23,200

 $0 to

$11,600

 $0 to

$16,550
12% $11,601 to $47150 $23,201 to $94,300 $11,601 to $47,150 $16,551 to $63,100
22% $47,151 to $100,525 $94,301 to $201,050 $47,151 to $100,525 $63,101 to $100,500
24% $100,526 to $191,950 $201,051 to $383,900 $100,526 to $191,950 $100,501 to $191,950
32% $191,951 to $243,725 $383,901 to $487,450 $191,951 to $243,725 $191,951 to $243,700
35% $243,726 to $609,350 $487,451 to $731,200 $243,726 to $365,600 $243,701 to $609,350
37% $609,351 or

more

 $731,201 or

more

 $365,601 or

more

 $609,351 or

more

 

  1. Higher RMD Ages [3]

As of Jan. 1, 2023, retirees must begin taking required minimum distributions at age 73 unless they’ve already started. This was part of a gradual change made by SECURE Act 2.0 that will again raise the RMD age to 75 in 2033. This change can offer more flexibility to retirees who don’t need the money from their qualified accounts and otherwise would have incurred unnecessary income taxes. It also gives them an extra year to find other sources of income or to convert those funds to tax-free money. If you are turning 73 in 2024, your first year required minimum distribution from your qualifying accounts must be withdrawn by Apr. 1, 2025. In subsequent years, they must be withdrawn by the end of the year, or you may incur a 25% excise tax, which may be dropped to 10% if corrected in a timely manner.

  1. Elimination of RMDs for Roth 401(k)s [4]

One of the perks of the Roth IRA is that it does not come with required minimum distributions because you purchase them with already-taxed money. Roth 401(k) accounts through your employer were the same—except for the employer matching part. Before the passage of the SECURE 2.0 legislation, if your employer offered matching contributions and you chose a Roth 401(k) instead of a traditional 401(k) account, employer matching funds had to be placed into an entirely separate pre-tax traditional account which was taxable. Then, upon reaching RMD age, withdrawals were mandated for both accounts, even though taxes were only due on the matching portion.

Now, as of the passage of the SECURE 2.0 legislation, employers at their discretion can offer their matching amounts on an after-tax basis into Roth 401(k)s or Roth 403(b)s. If your employer offers this option and you choose it, you will owe income taxes on the employer match portion in the year you receive the money, but RMDs will no longer be due.

  1. Preparation for 2026 Tax Cut Sunsets [5]

Though tax cuts sunsetting at the end of 2025 won’t immediately impact 2024 retirees now, it may be crucial to begin preparing for the 2026 tax year. While the federal estate and gift tax exemption amount is currently $13.61 million per individual, it’s expected to drop back down to below $7 million in 2026. For those with larger estates, that could slice the amount of tax-free money going to beneficiaries in half. Income tax rates could also revert to what they were prior to 2018, meaning that it may be helpful to convert taxable income to tax-free income—for instance, by using Roth conversions—in the next two years. Additionally, those impacted by this change could also look to work with a financial professional to implement long-term tax strategies that give them the opportunity to pass their wealth to their beneficiaries as efficiently as possible.

  1. Higher Medicare Costs but Increased Social Security Payments [6,7]

Medicare costs are also up in 2024. Though Part A is free to beneficiaries, it does come with an annual deductible, which is up $32 from $1,600 to $1,632. Medicare Part B premiums are also up in 2024 from $164.90 to $174.40, an increase of roughly 6%. It’s important to know that those premiums are traditionally deducted from Social Security payments, which typically also rises with a cost-of-living adjustment determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W. In 2024, that increase is 3.2%, so while the adjusted checks won’t be entirely proportionate to the higher Part B premiums, the COLA may help to offset the extra costs.

If you think you’re ready to retire in 2024, we can help! Give us a call today to work with a professional and start the transition into the most exciting time of your life. You can reach Drew Capital Group in Tampa at 813.820.0069.

 

Sources:

  1. https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
  2. https://www.bankrate.com/investing/long-term-capital-gains-tax/
  3. https://www.milliman.com/en/insight/required-minimum-distributions-secure-2
  4. https://smartasset.com/retirement/how-roth-401k-matching-works-with-your-employer
  5. https://www.thinkadvisor.com/2022/12/07/the-estate-and-gift-tax-exclusion-shrinks-in-2026-whats-an-advisor-to-do/
  6. https://www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles
  7. https://www.ssa.gov/cola/
Dec 27
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Your 2023 Year-End Financial To-Do List

By Financial Planning

The end of the year is upon us. Here are some tasks to check off before 2024 arrives!

It’s that special time of the year when the holiday spirit is in the air, good friends are always near, and family time fills up our schedules. It’s also the perfect time to take financial inventory and reassess your plan to see if it still aligns with your goals. You may need to make tweaks, as your circumstances have almost certainly changed. Maybe that’s because of a major life event or an unexpected expense, which most people experience or incur over the course of a year. It’s only normal, but it can be helpful to ensure that you’re still on track toward the future you idealized. Here are a few things you can do to prepare for the turn of the calendar!

  1. Review Your Financial Plan

Your financial plan is never meant to be a “set-it-and-forget-it” type of document. Just like the economic landscape, it’s supposed to change, and the end of the year can be the perfect time to make necessary adjustments that get you back on track toward your goals. Sometimes, those changes can even be for the better or because you had a successful year. For example, maybe you are quickly approaching or have already surpassed a goal you set at the beginning of the year. You can recalibrate your approach for both the short and long term to keep yourself motivated. If you find that you’ve suffered an unfortunate setback, that’s also okay. Your plan is a great place to start when trying to get back on track toward your ideal destination.

  1. Adjust Your Monthly Budget

As we near the end of the calendar year, you may have a better idea of your current income and expenditures. Sometimes, that can help you create a more accurate budget, especially if that budget aligns with your financial plan. Additionally, you might have received a nice annual bonus or raise, giving you some more leeway or freedom in your budget, or giving you extra funds to save or create an emergency fund. On the other hand, maybe you had a baby or accrued unforeseen home, auto or medical bills, forcing you to take a moment and reprioritize. Whether you believe you’ve taken a step forward or a step back, mapping out your expenditures and tweaking your budget accordingly can be helpful as we head into 2024.

  1. Review Your Investments

How did your investments perform this year? If you can’t answer that question, it’s probably a good idea to look, especially if you plan on using that money in retirement. Remember, the years leading up to retirement and the first few years of retirement are the most dangerous times to experience market volatility, as you likely take those losses when your asset totals are the highest. It can also be helpful to further diversify your portfolio or build a new asset allocation that aligns better with your goals. Though diversification certainly doesn’t promise either growth or protection, different asset classes can offer different features, potentially giving you the opportunity to achieve protection through varying and potentially less volatile investment or saving vehicles.

  1. Recalibrate Your Retirement Account Contributions [1,2,3,4]

No matter which stage of your career you’re currently at, it’s important to know how much of your income you can contribute to your various retirement accounts, such as 401(k)s, IRAs, 403(b)s, 457 plans, SEP IRAs and SIMPLE IRAs. For example, in 2023, the contribution limit for traditional and Roth IRA accounts is $6,500. That amount will increase to $7,000 for the 2024 tax year. If you’re older than 50, you can also make catch-up contributions up to $1,000. The contribution limit for a 401(k) participant is $22,500 for the 2023 tax year; however, that will rise to $23,000 in 2024. Catch up contributions of up to $7,500 can also be made to 401(k) accounts for those 50 and older. NOTE: These limits are imposed on individuals, not accounts, so the limits are on total contributions to all of your different employer-sponsored accounts or IRAs. It’s also important to remember that you can contribute to your IRA for 2023 until Tax Day of 2024, which is on Monday, Apr. 15. 401(k) contributions, however, must be made by the end of the year.

  1. Take Your RMDs [5,6]

If you must begin taking RMDs in 2023 or you’ve already begun taking RMDs, those funds must be withdrawn by the end of the calendar year to avoid incurring a 25% excise tax. That makes right now the perfect time to ensure that you’ve withdrawn an adequate amount, as there is still time to pull from your qualified retirement accounts. It can also be beneficial to speak to your financial advisor who can help you calculate your RMDs, as they’re typically determined by your expected lifespan and asset total. To see when you must begin taking RMDs, please refer to the chart below!

Date of Birth RMD Age
June 30, 1949, or Before 70 ½
July 1, 1959, to Dec. 31, 1950 72
Jan. 1, 1951, to Dec. 31, 1959 73
Jan. 1, 1960, or After 75

 

  1. Spend Money Left in Your FSA [7,8]

Flexible savings accounts, or FSAs, are accounts funded by pre-tax money that allow you to use tax-free funds to pay for qualifying health expenses. They can be extremely helpful for those looking for tax advantages for services that are not covered by their health care plan, including deductibles and co-pays. While you may have a grace period provided by your employer, with most FSAs you must spend the money for qualifying health expenses by the end of the year or risk losing it. Some expenses that traditionally qualify include general wellness appointments, annual physicals, visits to specialists, dental cleanings, eyeglasses or in-home care equipment.

Similar to FSAs, HSAs, or health savings accounts, can be used for medical expenses, but the accounts are permanent and stay with the owner. HSAs are tax-deductible and can grow and build up tax-free to cover a long list of medical, health, dental and vision expenses, usually in retirement. In order to open and begin contributing to an HSA, you must purchase a high-deductible health plan that qualifies, or be offered an HDHP through your employer. You cannot contribute to an HSA when you are over the age of 65.

  1. Review Your Workplace Benefits and Beneficiaries

Most benefits plans change on a year-to-year basis, and those changes are typically outlined by your human resources department during the open enrollment period. If your employer provides benefits packages, be sure to go through your benefits guide to know exactly what you’re entitled to and how you can leverage those perks to your advantage. For example, you may be able to select from different health care packages, or you might be able to opt into an HSA or FSA. It’s also important to review beneficiaries who are on your plan, as their needs may differ on a year-to-year basis.

  1. Talk to Your Financial Professional or Advisor

Your financial professional, planner or advisor is meant to be your personal advocate and consultant when it comes to your financial and lifestyle goals. That means they can help you determine whether you’re on track to reach your goals. If not, they can work with you to set more reasonable expectations, but if you find yourself on the right track, they can help you further purpose your money for both the short- and long-term future. Additionally, your advisor should soon be calling to set up an annual meeting with you to discuss updated options, new regulations, developments in the marketplace and more. As we close out the year, now is the perfect time to have that meeting and prepare for new circumstances and the new year.

If you have any questions about your year-end financial to-do list and how you can prepare for the year ahead, please give us a call today! You can reach Drew Capital Group in Tampa at 813.820.0069.

 

Sources:

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  2. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
  4. https://www.thinkadvisor.com/2023/09/27/smaller-401k-ira-contribution-limit-increases-expected-in-2024/
  5. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
  6. https://www.orba.com/what-is-your-required-minimum-distribution-age/
  7. https://www.goodrx.com/insurance/fsa-hsa/hsa-fsa-roll-over
  8. https://www.investopedia.com/articles/personal-finance/082914/rules-having-health-savings-account-hsa.asp

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.

 

 

Nov 28
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Why Long-Term Care is an Important Part of a Financial Plan

By Financial Planning, Long Term Care

It’s National Long-term Care Awareness Month, so it’s the perfect time to discuss the importance of preparing for the potential need for care.

Financial planning can be a complex process, especially for those looking for a comprehensive plan that accounts for every aspect of their life. That comprehensive plan traditionally includes budgeting, investing, tax-mitigation, estate planning, and as you get closer to retirement, should even include Medicare and Social Security. One aspect that often goes overlooked, however, is planning for long-term care, or the potential of needing this extremely intricate, intimate and pricey care. Let’s go over why it’s important to include long-term care planning as part of your holistic financial plan, as well as a few ways you might be able to mitigate the potential of it draining your savings.

It Can Help You Preserve Your Hard-Earned Assets [1,2,3]

The unfortunate reality is that seven in 10 of today’s 65-year-olds will need some type of long-term care, and 20% will need it for longer than five years. When long-term care can cost more than $100,000 per year for a private room in a nursing home, it’s easy to see how even a short-term stay be detrimental to a financial plan by draining savings and upending long-term plans. Preparing early for the possibility of needing long-term care can help you avoid the stress and pressure of scrambling for the funds or clearing out the savings accounts you’ve worked so hard to grow.

It’s Not Covered by Medicare

A common misconception is that long-term care or extended stays in assisted living or nursing home facilities are covered by Medicare. It does cover some stays in skilled nursing care if, for example, a medical condition has necessitated that level of service; however long-term care is considered a lifestyle expense rather than a medical expense, so it’s not covered by the federal program. That means that even if you work with a financial professional to find the right Medicare or Medicare Advantage plan for you, you may still be lacking the coverage you need, again forcing you to foot a bill that can quickly deplete funds for even the most diligent savers.

It May be Able to Extend Your Independent Lifestyle

Planning for long-term care is about so much more than just the care itself. It’s about giving yourself the opportunity to make life-altering decisions in any scenario. A clearly defined plan to pay for long-term care can help you retain your agency and decision-making power, even if you’re no longer capable of living on your own. It can also be helpful to know that you have a plan in place in the event of the worst, potentially giving you confidence and saving you from the stress that can come with having to make a decision and arrange for your care at the last possible moment.

You Can Shoulder the Burden for Loved Ones

Just as your plan is about more than the care itself, your plan is also about more than you. If you create a comprehensive plan that determines how you’ll be cared for as well as how you’ll pay for that care should you need it, your family may not be subjected to the emotional and financial burden that can come with making those decisions at a moment’s notice, especially if your health and capabilities have deteriorated beyond being sound of mind. Additionally, a plan can give your family the same assurance it gives you, as they can potentially gain confidence that you’ll be in capable hands should you need high-level care for an extended period.

You May Prepare and Gain Access to Better Care

The flexibility you offer yourself by preparing early can also give you access to the quality of care you need, whether that be at-home care or assistance in a long-term living or nursing facility. It can also help you build the financial resources or secure a spot if you need a specific level of care, such as memory care, that often sees openings fill quickly at the best facilities. Furthermore, depending on the saving vehicle you use, you might be able to build more assets you can use to fund your stay. Those funds might help you relieve the stress of finding new methods of payment, relocating to a different facility or falling into the hands of a family member who likely isn’t capable of providing you with the assistance you need.

There Are Modern Options to Pay for It

Modern times have brought about innovative solutions to pay for long-term care. Long-term care policies of old still exist, giving policyholders the option to pay premiums for a service they may never use, but now, long-term care insurance can be tacked onto other types of insurance products, such as permanent life insurance policies, to combine benefits. This means that your long-term care policy can come with the same features as permanent life insurance. This is important because it can potentially eliminate the “use-it-or-lose-it” aspect of long-term care policies of old. The cash value portion of the hybrid policy that is protected and guaranteed by the claims-paying ability of the issuing insurance carrier can be used to pay for long-term care if you need it or as a death benefit for your beneficiaries if you don’t. It’s still important to work with a financial advisor to see if one of these hybrid policies matches your goals.

If you have any questions about how you can prepare to fund long-term care, please give us a call today! Give us a call today to explore your options. You can reach Drew Capital Group in Tampa at 813.820.0069.

Sources:

  1. https://www.genworth.com/aging-and-you/finances/cost-of-care.html/
  2. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
  3. https://www.theseniorlist.com/nursing-homes/costs/

 

Life Insurance: Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

This site contains links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

 

Oct 26
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Why Estate Planning is About More Than Money

By Estate Planning

October is National Estate Planning Awareness Month! Here’s how the right plan can help you protect your family.

Estate planning is only for the extremely wealthy. I don’t have enough assets to need a will. My family will figure it out. Things will sort themselves out. I’m way too young to start thinking about a legacy plan. Making an estate plan is just too expensive right now. These are just some of the most commonly believed myths about estate planning we hear directly from our clients. But the fact is, they’re just that: myths. They hold little weight and don’t account for the true value of estate planning, which goes beyond asset total, age and what’s going to happen to your possessions after you pass.

An estate plan is about so much more than money. It’s about retaining your autonomy and continuing to have a positive influence on your family, your business and the world. You also might be surprised to discover just how easy and affordable it can be to develop an efficient and effective estate plan. Here are just a few ways a legacy plan can provide more than just financial protection.

  1. Peace of Mind for Your Family

It can be extremely difficult to lose not just a provider but a valued, trusted and loved head of a household. An estate plan can give your loved ones a bit of peace of mind when you pass, no matter how much money or which assets you plan on transitioning to them. Your estate plan can save them from being thrust into the emotional turmoil that can come with facing costly and time-consuming probate courts and distributing what remains of any assets themselves. It can also prevent potential inter-family battles over property, money and possessions. While it’s not uncommon to find that heirs would rather receive items with sentimental value than monetary value, disputes can happen within even the most normally-agreeable family members during this stressful time. An estate plan can give final directives that outweigh any arguments between beneficiaries.

  1. Protection for an Uncertain Future

It’s important to remember that no one can predict the future, and while we can weigh options and place ourselves in advantageous positions or mitigate the potential of risk, there’s always at least a semblance of uncertainty. An estate plan can protect against the worst-case scenario, especially for those who are newly married, just starting their careers or in the beginning stages of building a family. Of course, it can be difficult to have the conversation about what will happen if a provider unexpectedly passes, but it might be worth it to know that you won’t be caught off guard. It can also be helpful during periods of uncertainty in tax legislation and regulation. One of the most common uses of an estate plan is to mitigate tax obligation, and it may offer strategies that can help more of your hard-earned wealth land in the hands of those who are important to you.

  1. Security for Your Dependents [1,2]

Though the last will and testament is the most well-known document in an estate plan, your plan should also include medical powers of attorney, guardianship, durable powers of attorney (related to financial decisions), and potentially a trust or trusts depending on your situation. These features of an estate plan offer different protections and levels of security for your dependents in a variety of ways. A revocable living trust, for example, is a trust that allows assets to be added or removed at any time while you are still living. Often included in an estate plan, it can give the trust owner full control over their assets, potentially making it easier to manage and update. A trust can continue to distribute assets to heirs based on a time schedule created by the original trust owner, as it also includes a successor trustee who would manage the assets after the owner passes or if the owner were unable to make decisions on their own behalf. Another popular type of trust that can potentially act as a tax mitigation strategy is an irrevocable life insurance trust, or an ILIT, which is a trust that holds life insurance policies. Though the policyholder would no longer be able to leverage the policy for living benefits, it can pay out a tax-free death benefit by excluding the policy from the grantor’s estate, saving beneficiaries from the stress that could come with being forced to sell major assets to cover estate taxes.

  1. Direction for Your Business

An estate plan isn’t just for your family. It can also offer directives for your business should something happen to you by appointing a financial power of attorney, which can be important even if you haven’t passed. Maybe your health has rendered you unable to make financial decisions on behalf of your business. In that case, the person with financial power of attorney can make those choices. This gives you even more say when it comes to your business, as you can appoint someone who follows your thought process and philosophy. An estate plan can also include a plan for succession, dictating who will be entrusted with your business when you pass or exit. Furthermore, your business might be your legacy, so being able to choose who takes over in the CEO chair can give you the power to hand the keys to someone who you know will keep your business moving in the direction you always envisioned.

  1. Commitment to the Causes You Care About

While a key objective of an estate plan can be helping your family navigate a tumultuous period, it’s also possible to help the organizations and foundations you believe in with a significant financial contribution. You can make the decision to contribute to different charities or support causes you’re passionate about like education, the environment, social initiatives or animals. Again, this allows you to have even more decision-making power over your own estate while also amplifying your voice in the fight to make a difference, even when you can no longer lend your valuable time. For some, this is the greatest legacy of all, opening the door for change on any scale. At the same time, it’s possible that charitable contributions can trim your tax obligation and help your family avoid estate taxes on major transitions of wealth, which again, alleviates some of the pain that comes with losing a loved one.

If you have any questions about estate planning and how you can plan to protect your family or business, we can help! Give us a call today to explore your options. You can reach Drew Capital Group in Tampa at 813.820.0069.

Sources:

  1. https://www.metlife.com/stories/legal/revocable-vs-irrevocable-trust/
  2. https://www.northwesternmutual.com/life-and-money/what-is-an-irrevocable-life-insurance-trust/

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment decisions, or any changes to your retirement or estate plans. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

 

Sep 25
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6 Key Features of Indexed Universal Life Insurance

By Life Insurance

Indexed universal life insurance is a type of permanent life insurance that offers different benefits to policyholders. Here is what you need to know!

Traditionally, life insurance has been one of those assets someone might hold but hope they never have to use. Often crafted to protect from the worst-case scenario, it’s most known for the death benefit it can offer heirs in the event of untimely death, providing a payout that has the potential to ease both financial and emotional tension. Modern life insurance options, however, can come with different features depending on the type of policy you purchase. Because September is Life Insurance Awareness Month, we thought it would be the perfect time to go over one of those options: indexed universal life (IUL) insurance.

NOTE: When reading this information, it’s important to remember that life insurance may require medical underwriting and sometimes policies can be denied. In general, the younger and healthier you are, the lower the cost of insurance.

  1. The Classic Death Benefit

The classic benefit of every different type of life insurance policy, including IUL, is the death benefit, which is typically paid out to the policy’s named beneficiaries tax- and probate-free in the event of the policyholder’s death. This can give your heirs a nice sum of money to cover things like burial and funeral costs, outstanding debt, and living expenses. It can be difficult to lose a provider, and a life insurance death benefit can ease some of that burden.

  1. Permanent Coverage

IUL policies offer permanence, which can make them a viable option for all ages. Unlike term life insurance, where the death benefit expires when the policy expires—typically in 20 or 30 years—an indexed universal life policy is a permanent policy that offers your beneficiaries a death benefit as long as premiums are paid and the policy is in force. While term policies can offer relatively affordable premiums for young, healthy policyholders, an IUL can lock in and guarantee coverage even if the policyholder develops a condition that would make them uninsurable later.

Increasingly popular [1], indexed life policies are sometimes purchased by healthy seniors as a way to transfer tax-advantaged wealth as part of their estate plan, or seniors may elect to purchase a policy which has long-term care benefits either built in or added as an optional rider to an IUL policy.

  1. Flexible Premiums

One of the key differentiators between whole life and universal life is flexible premiums. IUL policies allow policyholders to determine the monthly premiums they pay based on their desired death benefit and/or cash value in the policy. For instance, if your need for a high death benefit is not as great as it once was, you can pay lower premiums while still keeping your policy in force. Furthermore, the cash value portion of the policy can also be accessed to pay premiums, whether that’s by choice or by the policyholder’s inability to pay monthly premiums. On the other hand, policyholders with the funds to increase premiums to increase coverage can do so, potentially meaning a greater death benefit and a greater cash value.

  1. Accessible Cash Value Portion

Permanent life insurance policies like whole life and universal life offer a cash value portion that is funded by the policy’s premiums. Because the policy’s premiums are paid with post-tax dollars, that cash value is accessible to the policyholder for any reason as a tax-free loan, potentially making IUL a useful source of income for retirement, postsecondary education, a downpayment for a home, or any other major expense. Granted, borrowing from the cash value of a policy does accrue interest per policy terms; however, the cash value in an indexed universal policy also continues to be credited interest as if the borrowed amount is still there, again based on the contract terms. That gives the cash value a chance to keep pace with, or even outpace, the amount the policyholder owes in interest. Furthermore, if the policyholder uses the cash value as a tax-free source of retirement income and never pays it back, the borrowed amount plus interest is simply taken from the death benefit. It’s important to read and follow the contract terms carefully to make sure that the policy stays in force whenever the cash value is borrowed.

  1. Guarantees Provided by Carrier

In addition to being accessible as a source of tax-free income, the cash value in an indexed universal policy also comes with guaranteed principal protection and growth that correlates with a preselected market index. Those guarantees are made by the claims-paying ability of the issuing insurance company, and they can allow you to participate in at least a portion of the market’s upside without subjecting you to its bottomless floor. This can make indexed universal life a helpful tool for those without the stomach or tolerance for market risk. Depending on investment, saving and lifestyle goals, it can also help to diversify a portfolio with a non-correlated asset class that still offers potential market upside.

  1. Long-Term Care Hybrid Policies

Nearly 70% of today’s 65-year-olds will need some type of long-term care (LTC), and 20% will need it for longer than five years [2]. It’s also important to know that extended stays in long-term care facilities are not covered by Medicare, as they are considered lifestyle expenses as opposed to medical expenses. That means that today’s retirees may want to consider the possibility of needing LTC, as well as a way to cover the potentially exorbitant costs. Modern hybrid policies can give policyholders the option to combine their life coverage with long-term care coverage, eliminating the “use-it-or-lose-it” aspect of long-term care policies of old. If you need the benefit to pay for long-term care, it can be used to pay for those expenses, but if you don’t, it can be converted to a death benefit for your beneficiaries.

What You Should Know Before Purchasing an IUL Policy

As all saving and investing vehicles do, IUL policies have drawbacks that you should be aware of prior to signing on the dotted line. It’s important to recognize that these policies are contracts with an issuing insurance company. As contracts are legally binding agreements that can be complex or skew in the favor of one party, it’s always a good idea to speak with a financial professional who can explain how interest is credited and fees are assessed. Additionally, the fees on IUL policies tend to be higher than those of other types of life insurance, meaning that your cash value and growth can erode if the policy is not properly structured.

It’s also crucial to note that while IULs offer the potential of market upside, the terms of the contract typically guarantee a participation rate at a fraction of the market’s growth, meaning that your cash value may not always grow at the rate of your selected market index. Some may even guarantee growth up to a certain point, called a cap, or they might change the participation rate after a select amount of time contributing to the policy. Again, these are aspects of your policy you should be hyperaware of prior to engaging.

IULs may also come with surrender periods, which are predetermined periods of time that you are not allowed to withdraw funds from the policy. Doing so may force you to incur surrender charges, which can significantly impact the cash value policy in addition to the growth potential. It’s also critical to consider the opportunity cost of a permanent life insurance policy. As mentioned above, IULs can come with capped growth or rates of participation. Investing money directly in the market comes with no ceiling, meaning the potential of your investments can be higher. Granted, market investments also come with no floor, meaning that your investments could plummet and significantly impact your ability to provide for yourself in retirement, but it’s still imperative to weigh your options and speak to your financial professional before making major decisions about your future.

If you’d like to find out if an indexed universal life insurance policy might align with your unique financial circumstances and goals, we can help! Give us a call today to explore your options and build a plan for your future. You can reach Drew Capital Group in Tampa at 813.820.0069.

 

Sources:

  1. https://insurancenewsnet.com/innarticle/indexed-life-sales-up-28-drives-strong-q2-for-life-insurance-wink-says
  2. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Life Insurance: Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Indexed universal life insurance policies can offer flexibility and potential for cash value growth, but they come with complexities, costs, and limitations that should be carefully considered. It’s essential to thoroughly research and understand the specific terms and features of any IUL policy before purchasing, and consider consulting with a financial advisor to assess whether it aligns with your financial goals.

Aug 30
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Financial Flexibility at Each Stage of Life

By Financial Planning

What does financial flexibility mean to you? It could give you the opportunity to pursue personal goals and milestones while shouldering less of a financial burden.

We truly believe that financial flexibility is achievable for everyone, no matter their income level, present outlook or future objectives. But what opportunities does financial flexibility typically unlock, and how do those change as you age and progress through both your life and your career? Here are a few phases and milestones as well as the possibilities that may be available as you work toward your financial independence.

20s

In your 20s, it can be difficult to earn a salary that opens the door to financial flexibility. For those living paycheck-to-paycheck, it can be a good idea to develop a budget and stick to it as closely as possible. Obviously, emergencies will arise, potentially in the form of auto repairs, home repairs or medical bills, but your budget should account for emergency saving, and it can be beneficial to contribute to that rainy-day fund during months without surprise expenses. Then, while living within your means in your 20s, you can focus on building your career, perfecting your craft and working toward a salary that gives you more financial flexibility than you might have had upon graduating from college. If you are lucky enough for your earnings to outpace your expenses this early in your career, you can begin paying down high-interest debt, make a down payment on a home or consider starting a family. It’s also important to remember, saving any amount can be better than saving nothing, even if you aren’t growing your savings at a lucrative pace.

30s

By your 30s, you might be a bit more settled, either with a family or an estimation of when you’ll begin your family. You may also have a better idea of who you are, your goals, your dreams, your passions and your desired lifestyle. Financial flexibility in this stage can allow you to indulge in those dreams, potentially with grander vacations, elimination of hand-cuffing debt, continued repayment or payoff of your home loan and car, and the ability to provide for your loved ones. You can also consider an estate plan or a life insurance policy to protect those who might rely on you, giving both you and your beneficiaries some peace of mind should something happen to you.

40s

Once you reach your 40s, you might have a better idea of the life you’ve built, the family you’ve raised, and the expenses you typically accrue on a monthly or annual basis. If you do have more certainty in your estimated expenses, it’s possible that you can stick to your budget more easily. Though there’s no such thing as “excess” when it comes to saving, financial flexibility in your 40s could allow you to travel or begin a search for a second home or a vacation home. This is provided that you have the flexibility to explore these options, of course, and we’d always recommend speaking to us prior to making any major financial decisions, but surplus in your 40s could give you the opportunity to indulge in some of life’s luxuries while you’re still young and able-bodied.

50s

Though you should begin saving as early as possible, your 50s could be the perfect time to sock extra money away for retirement if your earnings outpace your expenditures. You should also be prepared to move on to a fixed income and protect yourself from market volatility. Additionally, it can be a good idea to reassess your estate plan and your life insurance policies, making necessary tweaks that may better suit the needs of you and your heirs. Moreover, if you’ve shored up all aspects of your financial and retirement plans, you may have some flexibility to spend on things like vacations, charities, vow renewals or other recreational expenditures.

60s

In your 60s, you may be on the cusp of retirement or already in retirement. That’s why this could be a good time to do your final pre-retirement planning, which could include the creation of income streams to keep you afloat while you wait until your full retirement age. You may also be in a comfortable position to begin looking at vacation homes, pursuing your various hobbies, checking off bucket list items or even enjoying a little bit of downtime. If you have grandchildren, you can begin exploring options that help save for further education, such as 529 plans or permanent life insurance policies.

70s

Having passed your full retirement age or beyond, you should have the monetary means to match your ample free time. The world is your oyster, and with sufficient retirement funds, you can plan fun things depending on your hobbies and passions. If you enjoy travelling, it could be a great time to take that once-in-a-lifetime trip because you no longer have to request time off work. You might also be able to tack onto a collection you’ve been building for decades. Maybe retirement simply means more time to spend with friends and family, and now that your time and your finances are flexible, you can develop those relationships without any inhibiting factors.

80s and Beyond

In this phase of life, it may be critical to consider the possibility of needing long-term care. Roughly 70% of Americans over the age of 65 will need some type of long-term care [1], so while it’s nothing to be ashamed of, it can be a good idea to be prepared. Still, however, you don’t have to stop living your life, even if your hobbies change. You may discover that you enjoy pastimes that cause less physical stress, such as attending art or theater shows. You should also continue reviewing your legacy plan and making changes such as for estate taxes and lessen the workload of your beneficiaries or protect them from expensive probate courts.

Financial flexibility may look different for everyone, but universally, it can be the key to unlocking the comfortability to achieve your dreams. To see how we can help you design a plan to become financially flexible and bring those dreams to life, please give us a call! You can reach Drew Capital Group in Tampa at 813.820.0069.

 

 

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your retirement plan. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

Sources:

1. https://www.singlecare.com/blog/news/long-term-care-statistics/

Jul 27
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7 Signs You May be Ready for Retirement

By Retirement, Retirement Planning

It can be difficult to know when you’re ready to retire, but checking these seven boxes may be a sign that the time is coming.

 

Preparing yourself for retirement can be scary, as so many variables and questions leave timing up in the air and offer little to no confidence when it comes to selecting the perfect moment to quit your job and spend your time doing what you want to do instead of what you have to do. There are, however, strong indicators that may help you realize that you’re ready to retire. While many savers and pre-retirees set concrete milestones and timetables, only a few of the important signs that you can retire comfortably have to do with your age. Here are some ways to know that you might be ready to leave the workforce.

  1. You Have Adequate Savings to Cover Your Projected Lifestyle Expenses

One of the first and most certain indicators that you’re ready to retire is having adequate savings to cover your projected lifestyle expenses throughout retirement. Granted, this will be different for everyone based on desired lifestyle and expected costs, which is why it can be helpful to consult your financial professional as you make your way toward retirement. They can help you determine a retirement budget that suits your spending habits and desired lifestyle, as well as the longevity of your savings in relation to that estimate. It can also be important to consider that your expenses may rise in retirement, as you might work to check off bucket list items you’ve had for years. It’s all part of the planning process that will be unique to you and your goals.

  1. You Are Debt-Free

It’s not typically a good idea to take on a pile of debt while living on a fixed income. With that in mind, ensuring that you have little to no debt when you enter retirement can be paramount to your ability to live your desired lifestyle and have a safe, secure post-career life. This could mean paying off credit card debt you’ve accrued while raising children, but it could also mean tackling home loan bills that never quite seemed to stop arriving in your mailbox. The problem with bringing your debt with you into retirement is that you stop working for your money and you start asking your money to work for you. While that’s the best-case scenario, it doesn’t always work perfectly in, for instance, periods of market downturns, which may force you to drain your savings to pay for necessities.

  1. You Have Secured Multiple Income Streams

Oftentimes, retirement isn’t as much about total savings as it is about income. That income is what you’ll use to cover your projected expenses, meaning it’s integral to your ability to provide yourself with the lifestyle you both want and deserve. In the modern retirement landscape, it can be helpful to secure multiple income streams that can provide different levels of growth and protection, thereby helping you fund your dreams with different sources of funds. Additionally, one retirement account may not suffice. Rather than relying solely on your 401(k), it can be helpful to add other retirement investment accounts or insurance products that match your goals, thereby allowing you to collect income based on which source is the most advantageous at a given moment, something your financial professional should be able to help with. Additionally, those extra income streams can be helpful if you decide to delay claiming Social Security. Simply by waiting past your retirement age, your benefit can be permanently increased by up to two-thirds of a percent each month—a total of 8% for each year you wait—offering an opportunity to enhance your benefit forever.

  1. Those Income Streams are Diversified Between Tax-Free and Tax-Deferred

Diversification of your retirement portfolio and tax-advantaged accounts may not guarantee success in retirement, but it could position you to offset certain tax obligations depending on future circumstances and legislation. On one hand, tax-free saving and investing vehicles, like Roth 401(k)s, Roth IRAs and permanent life insurance policies, can present a more secure option through offering tax-free growth and withdrawals. Additionally, later tax legislation probably won’t affect your withdrawals, and you may avoid required minimum distributions. Tax-deferred accounts, like traditional 401(k)s and traditional IRAs, are funded with pre-tax dollars then taxed as ordinary income upon withdrawal. While this can present an opportunity for greater growth, the tax landscape is ever-changing, potentially causing less certainty in how much you’ll have when you retire.

  1. You Have Liquid Savings

One of the first components of a healthy financial plan, no matter your age, is an emergency fund. The traditional recommendation for an emergency fund is somewhere between three- and six-months’ worth of living expenses, giving you the opportunity to cover necessary costs should you face an unexpected financial hurdle. In retirement, that liquid savings could prove even more important, as you may incur costs you don’t expect while living on a fixed income and drain funds meant to support your lifestyle for decades. As we mentioned above, it’s a good idea to clear most if not all of your debt prior to entering retirement, but having an emergency fund could help you protect yourself from car or home repairs, medical emergencies, part-time job loss and more. This is important even if you’ve shored up your savings and created multiple income streams.

  1. You Have Hobbies

While this isn’t necessarily financial advice, having hobbies you really want to pursue can be another sign that you’re ready to retire. Your free time is set to skyrocket, and you’ll need a few ways to spend it to avoid immediately becoming bored. If you don’t currently have hobbies, or ideas of how you’ll spend your free time, it may be a good idea to remain in the workforce a little while longer while you try a few different pastimes. Some ideas include traveling, collecting, learning a new skill, picking up a part-time job, starting a business, golfing, volunteering and more. The possibilities are nearly endless, as long as you’re doing something you love and something that drives you to get out of bed in the morning long after the alarm means that it’s time to get ready for work.

  1. You Have a Plan

Finally, having a written plan that is easy to follow and remain dedicated to is key to a successful retirement, and it’s important to create your plan long before you choose to leave the workforce. A successful plan isn’t just for decumulation and distribution of your various retirement accounts. It’s also a comprehensive map and strategy that outlines ways you will cover your many expenses, including those that simply bring pleasure. Furthermore, though you’ll certainly want your plan to be flexible and malleable, it can be helpful to have an idea of how you’ll use your funds, giving you a better grasp of how much you’ll spend on a monthly or annual basis and how much you’ll want to save prior to entering retirement.

The perfect time to retire will vary based on your unique circumstances, but we’re here to provide you with the education, tools and preparation you need. Give us a call today to explore your options and plan for the retirement of your dreams! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your retirement plan. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.