Confidence Wealth No Comments

Tax Rates and Brackets

Tax Rates and Brackets

This is meant to illustrate how confidence wealth can help with financial planning.

Tax Rates

Income Taxes

The United States’ tax system is progressive, which means that the greater your income the greater the tax that you pay on it. Many reasons exist for why your taxes are structured in this way. Essentially, the U.S. tax code is designed to recognize and address income inequality.

Currently, there are seven tax brackets in the U.S. These brackets are structured around your annual income for a given tax year. Please see the table below for an illustration of how these rates are set to work.

Tax Rate % Tax Bracket/Annual Income Tax Owed
10 Up to $9,525 10 Percent of Taxable Income
12 $9,526 to $38,700 $952.50 plus 12% of the amount over $9,525
22 $38,701 to $82,500 $4,453.50 plus 22% of the amount over $38,700
24 $82,501 to $157,500 $14,089.50 plus 24% of the amount over $82,500
32 $157,501 to $200,000 $32,089.50 plus 32% of the amount over $157,500
35 $200,001 to $500,000 $45,689.50 plus 35% of the amount over $200,000
37 $500,001 or more $150,689.50 plus 37% of the amount over $500,000

There are four ways you can file, which represents your tax status:

  1. Single
  2. Married, filing jointly
  3. Married, filing separately
  4. Head of Household

Here’s an example of your tax obligation if you file as single:

  • $9,524 at 10 percent=$952.40
  • The next $29,175 at 12 percent=$3,501
  • The final $11,301 at 22 percent=$2,486

Your taxes due at the end of the calendar year would be $6,939. If you apply the total taxable amount against annual income, your effective tax bracket is 13.9 percent.

The good news here is that you do not have to spend any time calculating your tax bracket because software programs handle that for you. For many people, an accountant is the individual who is asked to prepare tax return forms and those forms include all the calculations as well.

To the extent that you can invest in a tax-advantaged way, you should do so. Your best interests would be served by engaging with a financial advisor who will help you put together a short- or long-term investing plan. A wealth management plan will do its best to navigate your investments in a way that takes advantage of tax rules. By setting up a formal financial plan with an advisor, you are giving yourself the best possible hope, despite taxes, of having a successful outcome.

Confidence Wealth No Comments

Uses of Life Insurance

This picture helps depict the text having to do with uses of life insurance

Uses of Life Insurance

Ways of using life insurance

A permanent, whole-life insurance policy may be used to provide income to the beneficiary, or beneficiaries, at time of death. Most of us know and understand this. This is the primary function of a life insurance policy.

But a whole life policy has other uses, as well. Here, it’s important to make a distinction between a permanent policy and a term policy. Term is far more limiting in the uses it may serve, outside of offering up a death benefit. Term policies certainly come with advantages, no doubt. But only with a permanent policy may you put in place creative financial solutions in such a way that the policy has many more uses other than providing death benefits. Several of these are listed below.

  1. Cash flow. While it generally takes a whole life policy up to 10 years to begin generating cash flow, you can borrow against your policy much sooner. This method of generating cash flow is perhaps one of the most commonly understood advantages of a whole life policy. This is true because the life insurance industry, appropriately, goes out of its way to let policyholders know that this is a salient feature of how they can be used and why they should be purchased. Usually, you can pay the company back, with interest. Or you can have the loan amount deducted from the death benefit. As with all of these options, you should speak with an advisor before you decide to pursue a life insurance policy loan.
  2. Living benefits. Many newer policies now come with what are called “living benefits.” What this means, literally, is that you can access benefits, or policy payments, if certain afflictions develop regarding your health, without death being the trigger. These kinds of health issues usually surround whether you are critically or terminally ill or injured. Living benefits may be offered under term policies, but they are usually characterized in different ways from a whole life policy. Perhaps the best term here is “accelerated benefit riders.” However defined, these benefit options allow should allow you great flexibility should you have an unexpected need for cash.
  3. Tax shelter. The investment growth in a life insurance policy is tax-sheltered. That means that the investment return inside of your policy is not subject to taxation. It is allowed to continue growing (different kinds of investment alternatives exist and must be fully understood) tax-free.
  4. Estate preservation. If set up properly, the amount you pay in premiums to your policy may be deducted by your estate, thus limiting the amount of taxes you pay. Tax-free cash is available once the policyholder passes away and these payments may be used by heirs to cover estate taxes.
  5. Cash value for death benefits. If your policy permits, you may take your accumulated cash value and use it to purchase a greater death benefit. In this instance, rather than take a distribution of cash available to you, this amount can “go back” into the policy to increase the amount of death benefit that will be available to the policy beneficiary. The ability of your policy to offer this option is important, and you should carefully consider purchasing a policy that will not provide this level of benefit flexibility.
  6. There are numerous other advantages to purchasing life insurance. These far exceed the core reason, which is to provide for heirs at time of death. Many of these have to do with accessing the cash value portion of your policy. If there is one key provision of a life insurance policy, it is likely its ability to build a cash value that you can access for any number of reasons. These include loans to start a business or college education expenses.

Ways of using life insurance

It is important for you to understand the creative uses that life insurance policies offer. They are able to accomplish much more for you financially than simply paying burial expenses and providing income to your heirs. Know enough about them to know that you should seek out the advice of an experienced financial consultant before making any policy decisions.

Confidence Wealth No Comments

Tax-Advantaged Investments

What Are Tax-Advantaged Investments?

This image is meant to help define tax-advantaged investing

Tax-Advantaged Investments

 

Tax-Advantaged Investments

You’ve most likely heard the term “tax-advantaged” investments. And you may have wondered what kinds of investments fall into this category. Turns out, more than you might imagine. What’s also important to know is that you should explore these options and use them where they make sense.

It’s an obvious statement, but a tax-advantaged investment is any investment that provides a level of tax relief that other, dissimilar investments do not. Using these investment options will allow your money to accumulate more rapidly than otherwise. Following is an overview of selected tax-advantaged investments. It is not meant to be all-encompassing. It excludes real estate investments, which possess distinct tax advantages. The focus here is on the multitude of investment options that may be less familiar than real estate but are no less important and worthwhile.

Tax-Advantaged Investments

Municipal bonds: Sometimes referred to as “munis,” these are debt investments issued by federal and state and local governments that generate interest-free dividends. The interest rates they pay are federal tax-free and, if you live in the state where issued, usually tax-free there as well.

Employer-sponsored retirement plans: These are most commonly referred to as 401(k) plans (although similar arrangements exist under different IRS plan codes, such as 403(b) for non-profit organizations and 457(b) plans for governmental workers) and they allow your contributions into the plan to be deducted from your paycheck on a pre-tax basis. If you elect to contribute to a 401(k) plan and defer, for example, $5,000 a year, that amount will be contributed to the plan before any income tax is assessed. If you make $30,000 a year you will only be taxed on $25,000, a substantial tax break. The greater the contribution the greater the savings. On top of this, your investment will grow tax-free until you begin taking distributions. In theory, your tax bracket will be lower in retirement than it is now because you will, by default, be making less money. Being free of any tax during its accumulation, your account balance will grow more quickly than if you lose a certain percentage each year because of taxes.

Traditional IRA (Individual Retirement Account): IRAs are not new at all. They have been around for decades. An IRA is still one of the best tax-advantaged investments available to you. You set up an IRA and then contribute to it with after-tax dollars. Those contributions are usually tax-deductible. For tax year 2019, you may contribute up to $6,000 or $7,000 if you are over age 50. You may invest in a wide array of choices, including mutual funds and fixed-rate CDs. Your investment gains are not taxed until you begin to take distributions, and these distributions have rules connected to them. Withdrawals that take place in violation of these rules will typically be assessed a penalty.

Roth IRA: The Roth IRA has not been around as long as traditional IRA’s, but it offers up significant tax advantages as well. Roth contributions (but not earnings) may be withdrawn at any time. Contribution limits are the same as with an IRA. Contributions to a Roth IRA are not tax-deductible, but accumulations are not taxed. If you hold the account for five years, you may begin to take tax-free distributions (IRAs work just the opposite) because you’ve already paid taxes on the contribution. Even earnings from a Roth are not taxed at distribution. This is truly a distinctive feature, and it represents one compelling reason, among others, why you should ask your advisor about the Roth IRA.

Health Savings Accounts (HSA): If you are enrolled in a high-deductible health insurance plan (HDHP), as defined by the government, you can qualify for an HSA. Many health insurance providers will offer you the opportunity to participate in an HSA. You do so by deciding how much you want to contribute each year. For 2019 the limit is $3,500. Contributions are made on a pre-tax basis and earnings grow tax-free. Each year you may rollover your account balance if you choose, so your contributions will not be “lost” if unused. Investment growth is not taxable. Distributions from an HSA are not taxable after age 65, at which point you can use the asset to help cover Medicare costs.

Tax-Advantaged Investments

All these tax-advantaged options are worth a good look. They all offer distinct advantages that will allow you to put your money to the greatest possible use, which is another way of saying that when you are investing for the future you want to shield as much of that investment from taxation as possible. Some may be more suitable than others. You should ask your advisor which options are the best for you.

 

 

Confidence Wealth No Comments

Budget or Financial Plan

Why you need both a budget and a financial plan

Budget or Financial Plan

You Need Both a Budget and a Financial Plan

Budget or financial plan: it’s not “or,” it’s both.

Most of us know what a budget is, whether we follow one or not. Is a budget different in any material way from a financial plan? The answer, of course, is yes.

The term “financial plan” may be a bit confusing because many individuals and families have never actually established, or initiated, one. To add to the confusion, there are many misconceptions about what a true financial plan is or isn’t.

For example, while there might be some overlap between a budget and a financial plan, it’s important to know that the two are distinctively different. Your budget helps you keep tabs on your monthly spending habits to understand the full picture of your expenses and how much room, if any, you have left over at the end of the month: “room” here meaning available dollars for saving and investing. Your budget is a monthly liability versus asset reckoning.

Budget or Financial Plan?

Your financial plan, on the other hand, is a roadmap to your financial future; it tells you exactly what you need to do with your money every month to maintain your lifestyle and at the same time save for the future. It can contain implications of immediacy, but by its nature it is long-term in concept and creation.

The financial plan is not, though, a set-it-and-forget-it exercise. It’s also not a quick fix for your finances. Nor is it something only for the older or wealthy. It’s not synonymous with a wealth management plan, but they both strive to do accomplish the same results.

In this article, you’ll learn what a financial plan is, what it can do for you and why you’ll need one to achieve a comfortable financial future. And your budget informs nearly everything the plan is about.

The goal of any financial plan is to align your monthly budget—altered where necessary—with your long-term financial goals, and most of these have to do with how much money you’ll have for retirement.

Budget or Financial Plan?

Your budget is today and tomorrow and next week. Your financial plan is three, five, maybe thirty years down the road.

In other words, think of the financial plan as an instrument that may (or may not) allow you to maintain your current way of life while saving to maintain as much of it as possible when you no longer receive work-related income. Since this may be an awfully big goal, your financial plan needs to address financial strategy and tactics, and much of the latter will need to confront how you invest your money.

While a good financial plan encompasses much more than investing, investing remains the foundation of any plan, and this is essential to building your wealth over time. For this reason, it’s the most commonly recognized part of a financial plan. Investing, and investing wisely, are what will help you achieve your financial goals later in life. Remember, the financial plan will help get you to as close a satisfying retirement as possible.

Budget or Financial Plan?

To do this, the sound financial plan will always begin with a highly detailed inventory of your current financial position, and it will bring into play the all-important budget we’ve been discussing. It’s safe to say that your budget lies at or near the center of your financial plan—it informs what will become your financial plan. And if your budget changes—for example, you get a raise at work—at the next review of your financial plan, this new and highly important information will be incorporated into the next iteration of the financial plan.

Resistance to a financial plan often has to do with the sacrifices we may need to make now. Will I still be able to dine out three times a week? What about other areas of entertainment? Movies? Concerts? Can I maintain my current lifestyle?

Again, it depends. If your income is sufficient to support these and still save thoroughly for retirement, then perhaps you can continue living the way you do now. But what if you can? Wouldn’t it make sense to cut back on some of your expenses so you could increase your retirement savings dollars? Would you rather retire with, say, $150,000 more in your 401(k) by skipping a few nights out for dinner? And, understand this: over even short amounts of time these “sacrifices” can make a big difference in your retirement income.

Budget or Financial Plan?

Here’s what the prudent individual will do. Create a monthly budget that you can adhere to, one you can stick with for one year. Then, build your financial plan around that budget. Save as much as you can; sacrifice where sacrifice does not hurt you in any serious way. Then, create a new budget at the end of year one and ask your advisor if any changes need to be made to your financial plan because of any significant budget changes.

In the long run, these actions make a difference. These actions will enhance your retirement years, which is the goal of us all: to be able to stop working without too much sacrifice in what we enjoy doing. So, build your budget, see a planner, and be smart about retirement.

 

 

 

 

 

 

Confidence Wealth No Comments

Saving for Retirement: Start Yesterday

Start Saving for Retirement Yesterday

Social security alone will not get us through our retired years

Saving for Retirement

There’s a pending catastrophe in this country whose origins began in 1946 and ended, roughly, in 1964. These are the baby boom years. The war was over, and men and women wanted to get on with their lives and start building their futures. They did so by, among other things, having children. Lots of children. It’s estimated that today there are somewhere between 70 and 80 million baby boomers in the country. Some are quite old; others are just now entering their sixties.

These individuals have been putting a strain on several key social safety net programs put in place, in many ways, dating back to the Franklin D.Roosevelt administration but also back to President Lyndon Johnson and his Great Society initiatives in the 60s. These include, principally, Social Security and Medicare. The latter of these is not so much the subject of this piece. The former, Social Security, is.

Saving for Retirement

The average Social Security monthly payout is slightly under $1,500 dollars. Think about that for a moment. Let’s say you had an on-and-off working career, for whatever reasons. Or say that your lifetime wage was never what anyone would call generous. Either of those translates to a low Social Security payout. (An important component of your Social Security payout is predicated on lifetime earnings.) And even if your Social Security payout is considerably larger than the average, unless you have access to significant other financial resources, most of your income in retirement will derive from Social Security. You may have a pension, and if so good for you. You may have a fat 401(k) account—good for you, too.

But no matter your income, and no matter your sources of income, these days you can expect to live a long time after you turn 60-years old. A 60-year old male who does not smoke is expected to live to slightly beyond age 84! That’s 24 years. And during those 24 years, if you represent the average individual, you will get sick and sicker (not meant to be depressing but an expression of reality). So even though Medicare, assuming it goes largely unchanged from today, will cover most of those expenses. But not all. Even with Medicare, you’re still responsible for a portion of your medical bills and monthly payments into the system.

Social Security was never meant to be the principal source of income in a person’s retired life. It was meant to augment other sources of income—income from retirement plans, IRAs, personal savings and investments. All of these, even though they have existed only for about the last 40 years or so. But the proliferation of retirement programs, set in place by the Employee Retirement Income Security Act (ERISA) of 1974, has not provided the relief many expected.

From Nerd Wallet, here’s a 401(k) account balance by age groups:

Ages 20-29:

Average 401(k) balance: $11,600.

Median 401(k) balance: $4,000.

 Ages 30-39:

Average 401(k) balance: $43,600.

Median 401(k) balance: $16,500

Ages 40-49:

Average 401(k) balance: $106,200.

Median 401(k) balance: $36,900.

Ages 50-59:

Average 401(k) balance: $179,100.

Median 401(k) balance: $62,700.

Ages 60-69:

Average 401(k) balance: $198,600.

Median 401(k) balance: $63,000.

It is, of course, not surprising that the higher your age, the higher your account balance. But still, look closely at the numbers and you’ll see that savings through our retired lives are woefully low.

Again, from Nerd Wallet: the average IRA balance is approximately $97 thousand. Of course, not all (401(k) savers have IRAs.

Saving for Retirement

So, imagine this: You are age 59 and you have $179 thousand in a 401(k) and $97 thousand in an IRA. That’s $276 thousand in savings for retirement. This same individual is, actuarially, likely to live another 25 years. Assuming no growth in any of these accounts, or loss, that leaves this hypothetical individual with slightly over $11 thousand per year to live off. Then, add in the average Social Security balance and this individual is “earning” a monthly income of slightly over $12 thousand. This will barely cover the rent on a one-bedroom apartment in most cities and even in rural areas.

There’s a moral here and it’s shockingly obvious. Baby boomers will likely not have enough time to save sufficiently for retirement. Starting at age 60 is too late; it’s also too late to start at age 50. This post is not meant to address any legislative changes that may need to be instituted to assist these individuals. Maybe our lawmakers will somehow take this issue up, or maybe not.

But no one should rely on help from that arena.

Start saving for retirement as early as possible. Encourage younger individuals to begin to save now for retirement (although that can be a daunting task; we generally do not do well at thinking this far ahead when we’re younger).

Here’s an example:

 

Initial Deposit Savings Frequency/Amount Years Rate of Return Amount Earned/Saved
$5,000 Monthly/$100 5 7 percent $13,923
$5,000 Monthly/$100 10 7 Percent $26,429

 

In this scenario, saving an additional five years more than doubled the five-year savings total. This reflects the power of saving for retirement as early as possible. The trick is to do so wherever possible in tax-advantaged arrangements such as employer-sponsored retirement programs, IRAs, Roth IRAs, Keogh if self-employed—any of these is good and will help you significantly in your retirement years. And it’s almost never too late: start today, whether you’re 35 years old or 65 years old.

As the expression goes, you’ll be glad you did.