Understanding the Consequences of a Social Security Claiming Decision

According to an old proverb, the only two factors that inspire investors are greed and fear of losing money. That is, without a doubt, cynical, yet, like many ancient sayings, there is a grain of truth in it.

Is the same true when it comes to making a decision on retirement? There is evidence to show that this is the case.

Take, for example, the Thrift Savings Plan, where the program’s history of making investment decisions based on emotion, sometimes to the cost of account holders, was a significant factor in creating the lifetime L funds. They are meant to ride out the ups and downs of the investment markets, particularly the downs, by self-adjusting to balances that have been demonstrated through time to provide the optimum combination of risk and prospective returns for a given investment period.

For example, during the market crisis of 2008-early 2009, TSP participants transferred around $22 billion out of a program with approximately $200 billion in assets at the time, from stock-based funds to the government securities G fund, which had never lost money. That money was not invested in equities at the outset of a big comeback in March 2009, which continued for the next decade and a half.

During that period, they progressively shifted money out of the G fund and into the stock funds on a net basis. Still, it wasn’t until 2015 that the total percentage of investments in the G fund restored to its pre-recession level of almost 50%.

Then, only a few months later, in February and March of 2020, there was another flight to safety as the epidemic hit. This time into the G fund, which had $24 billion placed into it out of a total amount on investment at the time of around $560 billion. Stocks reversed direction rapidly once more, but investors were a little longer to react.

Selling low and buying high is investing conduct that is considered among the worst in the world.

That is a regrettable record of judgments about retirement funds, but maybe even more problematic are the ramifications of these decisions for another critical issue: when to begin retirement.

The anecdotes of colleagues who left their jobs on short notice due to personal reasons are almost universal among long-time federal employees. It may have been the rejection of a promotion, the advent of a new know-nothing political appointment, a shift in policy direction, or any of several other possibilities. It happens because roughly one out of every six government employees is entitled to retire at any moment.

However, recent research conducted by the Center for Retirement Research revealed how this might occur. The study’s purpose was to find out how individuals reacted to information about Social Security and whether or not that information impacted their decisions about when to take advantage of that benefit.

The information included yearly reports predicting when the Social Security trust fund will be exhausted, which is now predicted to occur in around 13 years. In those years after that, unless the legislation is modified before then, there will only be enough money flowing in from Social Security taxes to pay roughly 75% of the benefits that have been promised to the beneficiaries who will be in the majority at the time.

According to the researchers, it gauged responses to stories that contained that information but were otherwise identical save for the headline and the first line of the piece. Social Security Faces a Long-Term Financing Shortfall was the study’s title for the control group.

According to three other reports, the Social Security Trust Fund will deplete its reserves by 2034; the Social Security Fund is on the verge of insolvency by 2034, according to trustees; and revenues are projected to cover only 75% of scheduled Social Security benefits after 2034, according to trustees.

When compared to the control group, those in the three other groups expressed an intention to begin drawing Social Security benefits about a year earlier, which would result in a reduction in their benefit amounts. However, less than one-tenth of those in the other groups expressed an intention to begin saving more money for retirement. “If future recipients follow through on their desire to claim a year sooner, they will lock in lower monthly payments without having to increase their savings to make up for the difference,” the report stated. ”

The study also discovered that, after reading the story, which made it clear that the program could provide 75 percent of promised benefits in the long run even if no changes were made, nearly a fifth of those who responded said they expected to receive nothing or no more than 20 percent of their promised benefits in the long run. Another quarter of respondents stated that they anticipated getting between 20 and 60% of the total.

That first reaction appears to be motivated by greed, whereas the second seems to be inspired by fear. Make sure to keep an eye out for them when it comes time for you to make critical retirement decisions.

Contact Information:
Email: [email protected]
Phone: 4693581913

Bio:
I advocate for federal employees making the best benefit and retirement decisions for their unique situations.

After a 25 year career in personal banking I saw a need for financial education and retirement planning for those approaching retirement.

In recent years I have focused primarily on federal employee from both the CSRS & FERS systems. These federal employee face challenges in getting the information they need to make the best decisions for creating a successful retirement plan. I assist these individuals in navigating the retirement process.

The Benefits of a Phased Retirement Plan

The phased retirement program isn’t widely employed in the federal government, but it does exist. When it is used, it is almost always because an employee requested it and made a case for it to the agency management. To decide whether or not to make that effort, you’d need to know how valuable it is to you.

People who are entitled to retire under any combinations other than age 62 with five years of service or who are subject to mandatory retirement, can reduce their work hours to half-time while still receiving half of the annuity point they’ve accumulated up until that point. That’s without the offset that rehired annuitants usually get.

So What Are The Benefits?

Phased retirement can help you get the most out of your retirement funds. It can help relieve some of the weight of your nest egg by allowing for a gradual decline in earning income, depending on how long you prolong your phased retirement.

It also positively affects your mental health. Having a steady source of outside money can help alleviate some of the mental tension or stress that comes with such a major life adjustment.

But There Are Some Downsides.

Your benefits from Social Security could be cut.

Implementing a phased retirement approach could result in an inadvertent reduction in your Social Security benefits.

“Everyone eligible for Social Security has a full retirement age (FRA) that is determined by their date of birth. If Social Security benefits are chosen to begin before full retirement age while income is still being made, Social Security payments may be lowered.

The loss in benefits for those who file before reaching full retirement age can be significant, as much as $1 for every $2 earned beyond the Social Security earnings limit.

What Sort Of Argument Would You Have To Present?

Essentially, rather than losing you to early retirement, the agency would gain from retaining you on a part-time basis as an experienced employee for some time, during which you could offer value by teaching other staff. Meanwhile, keeping your hands in work that you presumably believe is essential while gradually easing into retirement rather than leaping into it.

Just keep in mind that if you owe outstanding deposits or redeposits to gain service credit, including those for active-duty military service, you’ll have to pay them off before the phased retirement period begins.

Note: If you don’t make the deposit and die while still in phased retirement, your survivors may be able to make a deposit or redeposit to claim the period as a survivor benefit.

Your enrollment in the Federal Employees Health Benefits (FEHB) and Federal Employees’ Group Life Insurance (FEGLI) programs will remain with your agency while you are on phased retirement. You will be able to continue paying the FEHB premiums pre-tax, which is only available to employees, not retirees. Your FEGLI coverage will be determined by your full-time pay.

When you retire from your phased retirement term, you will get the full annuity that was originally computed, as well as a second benefit based on the time you worked as a phased-retiree and credit for unutilized sick leave at that time. The full-time rates of the position will be utilized as the high-3 wage base for that additional benefit.

Your FEGLI and FEHB enrollments will also move from your agency to OPM at that time, just like they do on a regular retirement. That is, if you have fulfilled the participation conditions. In most cases, this means that you must’ve been continually registered for five years before retiring.

Contact Information:
Email: [email protected]
Phone: 4693581913

Bio:
I advocate for federal employees making the best benefit and retirement decisions for their unique situations.

After a 25 year career in personal banking I saw a need for financial education and retirement planning for those approaching retirement.

In recent years I have focused primarily on federal employee from both the CSRS & FERS systems. These federal employee face challenges in getting the information they need to make the best decisions for creating a successful retirement plan. I assist these individuals in navigating the retirement process.

Your forgiveness of the loan is one of the most attractive potential benefits of the Paycheck Protection Program (PPP). Thanks to the Paycheck Protection Program Flexibility Act (effective since June 5th, 2020), your options for loan forgiveness are more achievable and generous than before. The aim of the PPP loan is to help relieve small businesses and their employees during the economic impact of coronavirus/COVID-19.

The PPP is a 1% interest loan that can convert into a grant — as long as you spend the funds according to the rules. But PPP forgiveness is not automatic. Borrowers will have to request and submit a forgiveness document to the lender. This article explains several ways you can maximize the amount of your PPP loan that is forgiven.

If you’ve already received your PPP loan, congratulations — but you now have just 24 weeks (or until December 31, 2020, whichever is sooner) to use the funds appropriately, or you’ll have to repay them within the next 5-10 years (depending on your lender).

On June 5, 2020, the Payroll Protection Program Flexibility Act of 2020 (PPPFA) was signed into law. Several of the conditions of forgiveness, including applicable dates and loan usage percentages, have been changed, and new safe harbors were added. This article has been updated to reflect these changes. You can find the full text of the PPPFA here.

Here are some clarifications, considerations, and suggested documents that can help achieve your maximum PPP loan forgiveness. Last updated on June 9, 2020, the information that follows is based on official Small Business Administration (SBA) guidance in the SBA’s PPP Loan Forgiveness Application Form (SBA Form 3508), and updated with information from the more recent Payroll Protection Program Flexibility Act. Many of these rules (especially dates) have changed, and this article will be updated again as additional final guidance from the SBA becomes available.

While forgiveness details are complex, two overarching principles stand out: follow the PPP’s intent, and carefully document.

1. Remember the Basic 60% / 40% Rule

The CARES Act established the PPP to help small businesses maintain their employees and their payroll (or your own expected income in the case of sole proprietors or independent contractors) over this next period of 24 weeks. Qualified businesses can borrow up to $10 million at a 1% interest rate, calculated based on 2.5 times your average monthly payroll costs. 

As the program’s name implies, its intended purpose is to keep employees (or yourself) paid and employed, with some allowance for operating expenses like the business’ rent, vehicle payments, and utilities. As a general guideline, your business may be eligible for full loan forgiveness if you allocate 60% of the loan money to keeping all the full-time equivalent staff on payroll, with no more than 40% allowed for other overhead.

What if you’re unable to meet those criteria? Fortunately, partial forgiveness may be available under the 60% payroll threshold. Specifically, if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, they may continue to be eligible for partial loan forgiveness, according to a joint statement from SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin.

2. Documentation Can Be Your Salvation

Don’t take for granted that the SBA will forgive you simply on the assumption that you used the funds appropriately. Similarly, lenders cannot promise that the government will forgive all or any portion of the loan. The burden of proof will fall on you. Therefore, your best protection lies in the thoroughness of the documentation you maintain during the loan forgiveness period. 

3. Upon Loan Approval, Check These Numbers 

If your loan was approved, you’ll get an email with an SBA loan number and the loan amount. When that happens, immediately do some math, because you’ll need to know three numbers:

1. 60% of the total loan amount. That’s the minimum you’ll need to spend on payroll over the next 24 weeks (or if you were approved prior to June 5, 2020, you may still choose an 8-week period) to be eligible for full forgiveness. For example: if your loan is for $50,000, you’ll need to pay at least $30,000 to your employees.
2. Your number of FTE employees.
3. Each employee’s average monthly salary or wage. 

Numbers 2 and 3 are important because your total loan forgiveness can be diminished if you reduced employee headcount or compensation during the 24-week forgiveness period.

4. Calculate Your Headcount

To determine full-time equivalent (FTE) employees, follow the instructions on page 7 of the SBA’s PPP Loan Forgiveness Application Form. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.  Make sure to keep records that show your work on these calculations. 

Any reduction in loan forgiveness will be based on the difference between two numbers: 

1. Your number of FTEs at work during the 24-week loan window, and  
2. Your number of FTEs at work during one of these baseline periods (whichever is lowest):
   • February 15, 2019 to June 30, 2019 (19 weeks)
   • January 1, 2020 to February 29, 2020 (8 weeks)
   • If you’re a seasonal business, you also have the option of using either date range above, or any consecutive twelve-week period between May 1, 2019 and September 15, 2019, whichever yields the lowest FTEs.

For example, if you had 20% fewer FTE employees during the 24-week loan window, then your loan forgiveness may be reduced correspondingly by 20%. 

5. Keep Layoffs from Affecting Forgiveness

Did you have to lay off or furlough employees between February 15, 2020 and April 26, 2020? If you see you’re going to  come up short in your FTE headcount, you may still be able to avoid that reduction penalty. As long as you rehire all those employees (or an equivalent number) by December 31, 2020, then they will be included in your FTE count for the 24-week forgiveness period. 

If those employees don’t want to return, you may be able to fix that too. 

• It’s the headcount that counts — so you could even hire new employees to replace them. 
• Whether you rehire or replace, be sure to pay them at least 60% of the previous compensation, to avoid the forgiveness penalty for reduction in pay. 
• In determining FTE headcount, there are three exceptions that let you claim an individual as a FTE even though they are no longer employed with the company on the date of your forgiveness application. These are: 1) an employee that was “fired for cause”, 2) an employee who voluntarily resigned, or 3) an employee who voluntarily requested and received a reduction of his or her hours. In all of these cases, you’re only allowed to claim this individual if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.
• If a former employee refuses to come back to work (at the same hours and pay as before the layoff), document that communication. As long as you keep a written record of your offer to the employee and a record of their refusal, you can submit these later with your loan forgiveness application. Their FTE hours won’t be counted in your comparative averages, and you may still qualify for loan forgiveness. 
• If your business could not bounce back, you may be exempt from the FTE headcount rule. The PPPFA adds this exemption if “the employer is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

6. Consider rehiring even if you can’t reopen yet

One common question over the headcount issue is: how can you rehire employees if your business is still closed, even as mandated by stay-at-home orders? If your goal is to maximize forgiveness of the loan, current guidance from the SBA suggests you pay your employees anyway, whether your doors are open or they can work from home or not. 

“It’s counterintuitive, but Congress designed this program as a way for small businesses to keep their employees rather than laying them off and putting them on unemployment,”advises Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce. “[Congress] anticipated that you might be paying employees who actually physically can’t come to work who aren’t providing services — but they would rather pay you (through the paycheck protection program) to pay those employees rather than you laying them off.”

7. Keep Wage Cuts from Reducing Forgiveness

Because a pillar of the PPP is to keep workers paid, your loan forgiveness may be reduced if you cut the average wage of any employee by more than 25%. While the SBA has yet to issue guidance on how the amount of loan forgiveness would be penalized, it’s assumed to be on a dollar-for-dollar basis. The SBA form 3508 (PPP Loan Forgiveness Application) includes instructions on calculating the forgiveness amount.

So, for the covered period, you need to pay your employees at least 75% of their average wage based on what you paid them in 2019 (or if 2019 data isn’t applicable, based on their gross wages in the first quarter of 2020). This rule does not apply to employees who earned an annual salary of $100,000 or more ($8,333 per month) in 2019.

Note that there is a limit to the cash compensation any individual employee can be paid during this 24-week period ($100,000 prorated over the number of weeks in your forgiveness period). Keep this in mind if you’re considering adding bonuses such as “hazard pay” to help maximize forgiveness.

As part of your PPP loan application process, you should have already calculated your monthly payroll costs according to the guidelines provided for employers. It’s in your best interest to double-check and have those figures at your fingertips.

In the event reductions were made, you have one recourse. If, by December 31, 2020, you restore the employees’ pay to at least 75% of the same wage that they earned as of February 15, 2020, you can avoid this wage-reduction penalty.

8. Setup a Separate Bank Account (Optional)

Once you’re approved by the SBA, the lender has just 10 days to put the money into your account, but usually this happens very quickly. To make it easier to manage, track, and later document your loan’s appropriate usage, some accounting firms recommend that you open a separate bank account to hold the PPP funds. If you do this, remember to switch your payroll withdrawal account to your dedicated PPP account for the 24-week period. While a separate account is not required by the SBA, your alternative is to keep very meticulous records of all your finances and expenses, and that can be a headache.

9. Check Your Progress in a Month or Two

Halfway through your forgiveness period, take a look at how you’ve spent your PPP funds so far. If you notice that 60% of your expenses aren’t going towards payroll, or that your average FTE headcount or employee wages are below your thresholds, you may have time to make necessary adjustments in how you spend the funds you have left, including considering “hazard pay” bonuses, giving people promotions and raises, or hiring new employees. 

If you’re trying to use bonuses or raises to get your payroll spending up to the 60% required for full forgiveness, just remember that there is a total cash cap per employee ($100,000 prorated over the number of weeks in your forgiveness period). [Note: as of June 10, 2020, we’re still awaiting guidance from the SBA on a specific dollar cap amount.] However, you may still be eligible for partial forgiveness if you do not meet this 60% threshold.

10. Prepare and Apply for Forgiveness

Once your loan forgiveness window has closed (or by December 31, 2020, whichever is sooner), you can submit a forgiveness request to your lender. The deadline to apply for interest-free forgiveness is 10 months after the last day of the covered period. If you miss this deadline, you may have to make payments of principal, interest, and fees on the covered loan, beginning on the day that is not earlier than the date that is 10 months after the last day of your covered period.

As the borrower, you’re responsible for documenting how you used the PPP proceeds and to demonstrate that you did the following: 

1. Used at least 60% of the loan to cover for payroll costs (or if you’re an independent contractor, replaced your compensation based on your 2019 net income)
2. Did not reduce headcount during the forgiveness window (unless you’re able do document in good faith that you tried — see step #5 above)
3. Paid each of your employees at least 75% of their average wage (see step #7 above)
4. Used the remaining 40% of the loan (or less) for allowable overhead expenses:
   1. Rent or mortgage payments for your business
   2. Interest payments on a mortgage or other loan (such as an auto loan) you use to perform your business (but interest payments on any other debt incurred before February 15, 2020 are not eligible for loan forgiveness)
   3. Utility payments for your business

Even before your forgiveness period is up, it’s a good idea to prepare by organizing what you’ll need. First, ask your lender if they will require any specific documentation. As a general guideline, such documents may include:

• Payroll reports verifying your number of  full-time equivalent employees and pay rates (during both your baseline period and the forgiveness window)
• IRS and state tax and insurance filings
• Records of benefits payments
• Receipts, canceled checks. or other records of PPP-approved expenses like rent and utilities
• Statements for interest paid for debt obligations

You must also certify that the documents are true. Once you submit your request, your lender has 60 days to make a decision on the forgiveness.

What If You Don’t Qualify for 100% Forgiveness?

It may be difficult to flawlessly comply with (let alone document) the forgiveness requirements. However, amounts not forgiven simply convert into a 1% interest loan, payable over the next five to ten years (depending on the lender). There’s even a grace period. No payments would be required until the SBA remits the forgivable amount to your lender . If you do not request forgiveness, you will not have to make any payments for 10 months following the date of disbursement of the loan. (However, interest will still accrue from the date loan was disbursed.)

If there is evidence that you tried to manipulate the program, such as by providing false information, the SBA’s Interim Final Rule warns that you could be subject to additional charges for knowing violations or misappropriations. Furthermore, the rule states, “If a shareholder, member or partner uses PPP funds for unauthorized purposes, the SBA may have direct recourse against such shareholder, member or partner for the unauthorized use.”

Summing Things Up

To maximize your forgiveness, the first and most important step is to consult with your lender on the process and ask what documents you’ll need. 

It’s also helpful to remember that the payroll protection program was passed for the purpose of preserving people’s pay during the primary period of this pandemic. That’s the basic theme behind the forgiveness rules. (We’ll update this post to reflect any final rules.)

To maximize your potential loan forgiveness, first make sure you’re not reducing headcount or wages. Then make adjustments (through rehiring or increasing pay) to avoid reduction penalties and demonstrate that you’ve dedicated at least 60% of your loan to paying your employees (or yourself, if self-employed. Finally, ensure that what’s left over is spent only on approved business expenses.

Three keys to remember are: 1) follow the PPP’s intent, 2) carefully document, and 3) don’t do anything that makes it look like you’re trying to game the system. Just operate your business like you normally would, and play by the rules

Savings accounts, money market accounts, and certificates of deposit (CDs) can help boost your savings by accruing interest, all the while keeping your funds safe.

Understanding how these interest-bearing accounts function and how they differ will help you make the best decision.

What’s a money market account?

A money market account is an interest-earning savings account that’s available at the majority of banks and credit unions. You can generally use it to write checks and may be issued a debit card.

According to Federal Reserve Regulation D, a money market account is deemed a deposit account; therefore, the number of transactions, like transfers and withdrawals, is restricted to six each month. Some transactions, such as cash withdrawals from ATMs or bank tellers, don’t qualify as one of the six transactions. There are several exceptions to the rules. Contact your bank to find out its policy.

Money market accounts used to offer more interest than traditional savings accounts, but the yields are nearly identical in today’s historically low-interest-rate environment. If you find a better-yielding money market account, be ready to maintain a higher minimum amount or adhere to other criteria to receive the highest rate.

To discover the best rates, go to Bankrate to compare money market accounts.

What’s a savings account?

A savings account is the most basic form of bank account that’s designed for keeping your savings.

When you open a savings account, you’ll put some money into it. You can add and withdraw money as needed, but you won’t get a checkbook to access the funds. Instead, you’ll need to rely on online transfers or make in-person withdrawals at your bank. Certain banks will allow you to make ATM withdrawals if you have a debit card connected to a checking account.

Banks usually limit the number of times you can make a withdrawal from your savings account to six per statement period. Going above the limit may result in a fee, underlining how the account is intended for long-term storage rather than frequent transactions.

In exchange for allowing the bank to store your money, the bank will pay you interest on your savings account’s balance. Each statement period, the bank will deposit interest into your savings account, helping your balance increase.

Some banks impose minimum balance requirements and levy fees for savings accounts. Keep a watch out for these kinds of fees since they can eat away at the value of your savings over time.

What’s a CD?

A certificate of deposit (CD) is a type of savings account that allows you to store money for a set period of time.

When you open a CD, you must decide how much money to deposit and how long you want the money to remain in the account. You could, for example, open a one-year CD. The duration of a CD might range from a few months to five years or more.

Once the account is opened, you’ll be unable to withdraw funds until the specified time period has passed. If you do, you’ll typically be charged a penalty fee. In return for this lack of flexibility, banks tend to offer greater interest rates on CDs than on other accounts.

Most CDs have fixed rates for the duration of their term. Once your interest rate is locked in, it won’t change, making CDs ideal for savers who want to ensure that their interest rate won’t decrease. However, if market rates rise, the money in the CD will be locked in at a lower return, making long-term CDs risky.

Money market account vs. CD

A money market account, as opposed to a CD, has checking account characteristics. For example, you can usually write checks from it. You could also be able to obtain a debit card. Furthermore, a CD is a time deposit account, but a money market account is not.

A money market account typically pays less than a CD since a CD requires you to maintain your money in the account for a specified period of time. According to Bankrate, some of the best money market accounts yield up to 0.60 APY, while some three-year CDs can pay up to 1%. Higher-yielding money market accounts usually require you to maintain a greater balance.

Money market account vs. savings account

The flexibility and fee structures are the main differences between money market accounts and savings accounts.

Savings accounts are rather flexible, but unlike money market accounts, they generally don’t provide checkbooks or debit cards. Money market accounts are specifically designed to provide account users with an easy option to spend the funds in their accounts. Savings accounts are less flexible, and you must take a few more steps to spend money in the account.

Another difference is that savings accounts are typically much simpler and less expensive to open. Many savings accounts offer no or low minimum balances and fees that are easy to avoid or non-existent. Many money market accounts require a considerably greater minimum balance and charge monthly fees. That makes them more attractive among those with higher balances who desire the flexibility to make big purchases.

Advantages and disadvantages of money market accounts, savings accounts, and CDs

To compare these products, it’s necessary to first understand their pros and cons.

Money market accounts

Generally, money market accounts provide a greater annual percentage yield (APY) than regular savings accounts. Find out how your financial institution compounds interest. Daily compounding is most probable, with interest paid out monthly. In addition, look to see if the APYs are tiered. Frequently, you’ll have a lower APY until you get to a certain balance, at which point the APY increases. For instance, a balance of $100,000 or more may earn a greater interest rate than a balance of $10,000 or less.

Advantages

• Higher interest: In general, you may expect a greater rate of interest when compared to interest checking accounts and many ordinary savings accounts.
• Accessible funds: A money market account may have check-writing features, a debit card, and the capacity to make electronic transactions.
• A safe haven for your funds: Your account will be protected from loss at any credit union or federally insured bank,

Disadvantages

• Limited withdrawals: Opposite to a checking account, which doesn’t restrict any sort of transaction, money market accounts do. You cannot write an endless number of checks or make an unlimited number of electronic transfers.
• Account minimums:  You’ll be usually required to maintain a larger account minimum than with a savings account or even a CD.
• Monthly fees: If you don’t reach the account minimum, you’ll likely be charged a monthly fee.

Savings accounts

Savings accounts with no minimum balance restriction are currently yielding around 0.50% APY. Some savings accounts have minimum balance restrictions, but they are often lower than those of a money market account. However, like with a money market account, withdrawals are limited.

Advantages

• A safe haven for your funds: Savings accounts with Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) institutions are both insured and very liquid.
• Low fees and minimums: There are high-yield savings accounts with no monthly fees or minimums.
• Access ATMs: You can normally access your savings account through ATMs, making it easy to get money when you need it.

Disadvantages

• Lower interest rates: The APY on a savings account will most likely be lower than the APY on a CD.
• Withdrawal limits: There’s a set number of withdrawals you can make per month.

Certificates of deposit (CDs)

The most restrictive of these savings accounts is a certificate of deposit. To open a CD, you must usually deposit a minimum amount of money, and the money is locked away for a set length of time, depending on the term you choose. The duration of a CD can range from a few months to five years.

On Bankrate, you can compare the best CD rates.

If you take out money before the CD matures, you can expect to pay a penalty. Depending on the CD’s size, you could earn a greater APY on it than you would on a savings or money market account.

Advantages

• Higher Interest rate: Not only do CDs usually have higher interest rates than other savings accounts but their interest rate is also fixed and doesn’t change throughout the term, as it does with money market and savings accounts.
• No fees: Unless you withdraw your money early, you won’t be charged any fees.
• Term length options: You may decide how long you want to tie up your funds for it to generate interest. Banks frequently provide a variety of CD terms.

Disadvantages

• Low liquidity and access: You cannot withdraw funds from a CD via an ATM or by writing checks. Unless you make an early withdrawal, the funds are inaccessible.
• Penalties: Withdrawing funds before the CD term expires will result in a penalty. Some CDs enable you to withdraw money without penalty, but they usually have lower APYs and other restrictions.

Who should open a money market, savings account, or CD?

The type of account you should open depends on your financial situation and your goals. If you don’t have much money to begin with, a savings account makes sense because you may find accounts with no minimums.

A money market account is an excellent alternative if you want to earn a greater APY and can satisfy a higher account minimum. It’s also a great choice for those who need quick access to their money.

If you know you won’t need the money for some time and want to earn a higher APY, a CD is a good option. However, you should only commit the amount of money you know you won’t need before the CD matures.

How to use money market, savings, and CDs to save for your financial goals

Each of these accounts can help you in saving for a variety of purposes. You may use these accounts in tandem to achieve your objectives and maximize your earnings.

• Short-term goals: A savings account is ideal for short-term goals such as a vacation. You won’t get much interest, but it won’t matter much if you need the money soon.
• Medium-term goals: Since it requires a larger minimum balance and offers a greater rate, a money market account is more suitable for medium-term goals. Additionally, it’s liquid enough that if you need to access your cash sooner than intended, there are no penalties to pay.
• Long-term goals: CDs make sense if you’re saving for a long-term goal, like buying a house, especially if you have a large amount of money that you can afford not to touch for an extended period of time. Plus, CDs come with a fixed rate, so you won’t have to worry about rate changes.

The risks of using money market accounts, savings accounts, and CDs

Although FDIC insurance protects your money in the event of a bank collapse and NCUA insurance protects your money in the event of a credit union failure, there’re other risks to bear in mind when you consider these savings products:

• Inflation: The most significant risk you’ll probably face is inflation. Your return may not keep up with inflation as consumer prices rise. Although you won’t lose your principal, your purchasing power may erode over time.

• Interest rate fluctuations: Some accounts are more susceptible to the macroeconomic climate than others. Market circumstances determine savings, money market, and CD yields. When interest rates fall, your yield falls with them.

Since you lock in the rate for the term duration of the CD, you have some protection against rate volatility. However, if the CD matures during a low-rate environment and you renew it, you’ll be left with a lower yield than before.

Many investors opt to mitigate the risk of inflation by investing in other assets, such as stocks.

Learn how to turn a potential financial disaster into a minor setback

The prospect of a big bad event affecting your finances, such as a job loss, sickness, a car accident, or a pandemic, may keep anybody up at night. However, if you’re well prepared, the idea of something costly and out of your control becomes less frightening. Here are ten ways that could help you deal with an economic crisis.

KEY TAKEAWAYS

• Keeping track of your financial health requires having a monthly budget.

• Review your bills to determine whether you’re spending money you don’t have and pay them on time.

• Make paying off your credit card debt a priority, and go for cards with low-interest rates.

• Maintain everything properly, starting from your house to your health, to avoid costly problems in the future.

1. Increase Your Liquid Savings

Cash accounts like savings, checking, and money market accounts, as well as certificates of deposit (CDs) and short-term government investments, will be of the greatest help in a crisis. You should start with these resources since their value doesn’t vary in response to market circumstances, unlike stocks, exchange-traded funds (ETFs), index funds, and other financial instruments in which you may have invested.

That implies that you can withdraw your funds at any moment without suffering a financial loss. Additionally, unlike retirement accounts, you won’t get early withdrawal penalties or incur tax penalties when withdrawing your money, except for CDs, which often require you to forfeit part of the interest you’ve earned if you shut them early.

Invest in stocks or other higher-risk assets only when you have several months’ worth of cash in liquid accounts. How many months’ worth of cash do you need? It’s determined by your financial obligations and your risk tolerance.

If you have a hefty obligation, like a mortgage or ongoing tuition payments for a child, you may want to put up more months’ worth of costs than if you’re single and renting a place. A three-month expenditure cushion is considered the essential minimum. Still, some people prefer to retain six months, or even up to two years, of expenses in liquid savings to protect against a protracted period of unemployment.

2. Create a Budget

If you don’t know how much money comes in and goes out per month, you won’t know how much you need for an emergency fund. And if you don’t have a budget, you have no idea if you’re currently living within your means or overextending yourself. A budget isn’t a parent; it cannot and won’t force you to change your conduct; nevertheless, it’s a valuable tool that may help you determine whether you’re satisfied with where your money is going and where you are financially.

3. Get Ready to Reduce Your Monthly Bills

You may not have to do it right away, but be prepared to start cutting out everything that isn’t absolutely necessary. If you can reduce your recurring monthly costs as much as possible, you’ll have less trouble paying your bills when money is tight.

Start by reviewing your budget to see where you may be spending more money than necessary. Do you, for example, pay a monthly charge for your checking account? Look into how to switch to a bank that provides free checking. Do you spend $40 a month for a landline that you barely use? Learn how to cancel it or change to a lower-cost emergency-only plan. You may discover strategies to decrease your expenses right away to save money.

Perhaps you have a tendency of keeping the heater or air conditioner on while you’re not home or of leaving lights on in rooms you aren’t using. You might be able to reduce your electricity expenses. It may also be an excellent time to search around for reduced insurance rates and see if you may cancel certain forms of insurance, like car insurance, in the event of an emergency. Certain insurance companies may grant you an extension, so research the procedures and be prepared.

4. Keep a close eye on your bills.

There’s no reason to squander money on late fees or finance charges, yet this is something that many families do. During a job loss situation, you should be especially diligent in this area. Simply being organized can help you save a lot of money on your monthly bills. Over the course of a year, one late credit card payment may cost you $300. It may even result in the cancellation of your card at a moment when you need it as a last option.

Set up time twice a month to go through all of your accounts so that you don’t miss any deadlines. Schedule electronic payments or postal checks so that your payments arrive a few days before they are due. This way, even if there’s a delay, your money will most likely arrive on time. If you’re having difficulties keeping track of all your accounts, make a list. When your list is done, you can use it to ensure that you are on top of your accounts and determine if any can be combined or closed.

Non-cash assets, like frequent flyer miles, credit card rewards points, and gift cards, shouldn’t be overlooked.

5. Assess and maximize the value of your non-cash assets

Being prepared may include considering all of your choices. Do you have frequent flier points that you could use if you need to travel? Do you have any excess food in your home that you can use to plan meals around to reduce your grocery bill? Do you have any gift cards that you can use for entertainment or sell for cash? Do you have credit card points that can be converted to gift cards? All of these assets can help you reduce your monthly costs, but only if you know what you have and how to use it. Knowing what you have might also help you avoid purchasing stuff you don’t need.

6. Pay Off Your Credit Card Debts

If you have credit card debt, the interest rates you pay each month are likely to consume a sizable amount of your monthly budget. If you make it a priority to pay off your credit card debt, you’ll lower your monthly financial obligations and place yourself in a better position to start saving. By eliminating interest payments, you may set your money toward more important things.

7. Find a Better Credit Card Deal

If you’re already carrying a balance, moving your amount to another card with a lower interest rate may be beneficial. Paying less interest allows you to pay off your overall debt more quickly and/or acquire some breathing room in your monthly budget. Just be sure that the savings from the reduced interest rate outweigh the balance transfer fee. If you’re transferring your balance to another card with a low introductory annual percentage rate (APR), try to pay off your debt during the intro period before your rate increases.

It’s also worthwhile to ask whether your current credit card provider will lower your monthly interest rate. Companies will sometimes do this to keep you as a client; it’s less expensive for them to keep an existing client than it is to acquire a new one.

There are always ways to make additional money, whether by selling unneeded items, freelancing in your spare time, or even having a second job.

8. Look for ways to make more money.

Everyone may earn additional money by selling items they no longer use (online or at a yard sale), babysitting, pursuing credit card and bank account opening bonuses, freelancing, or finding a second job. The money you earn from these activities might appear little compared to what you earn from your primary employment, but even small sums might build up to something big over time. Furthermore, many of these hobbies have fringe benefits: you may wind up with a less cluttered home or realize that you like your side job enough to make it your full-time job.

9. Check Your Insurance Coverage

In step three, we suggested that you look around for reduced insurance premiums. If you have too much insurance or could receive the same coverage at a lesser price from another carrier, these are apparent improvements you may make to decrease your monthly expenses.

On the other hand, having great insurance coverage can prevent one catastrophe from stacking on top of another. It’s also critical to ensure that you get the coverage you require rather than simply the bare minimum. That applies to both existing plans and ones that you may need to purchase. If you suffer a severe sickness or accident that keeps you from working, a disability insurance policy may be invaluable, and an umbrella policy can offer coverage where your other plans fall short.

10. Maintain Routine Maintenance

If you keep the parts of your car, house, and physical health in good condition, you can detect issues early and avoid costly repairs and medical expenses later. It’s less expensive to fill a cavity than to have a root canal, simpler to repair a few pieces of wood than to have your house tented for termites, and better to eat healthily and exercise than to need expensive treatments for diabetes or heart disease. You may believe you don’t have the time or money to deal with these issues on a regular basis, but ignoring them can lead to far more significant disruptions in your time and budget.

The Bottom Line

Life is unpredictable, but if there’s anything you can do to avoid disaster, it’s to be prepared and cautious. With proper planning, you may turn a potential financial disaster into a minor setback.

The dream of most investors is to see their investments grow exponentially over time. They wish to have their initial investments back in multiple folds to achieve their short-term and long-term financial goals and obligations. There are many ways to do this, with different factors deciding the best strategy for individual investors. These factors include investors’ risk tolerance levels, amount of initial investment, and time horizon. 

What is Growth?

In the investment industry, growth can be measured in different ways. The first and most general sense of growth is an increase in the value of an asset. For instance, the interest received on a certificate of deposit (CD). However, a more specific definition of investment growth is capital appreciation. Capital appreciation occurs if there is a general increase in the value or price of the invested money over time. Investment portfolios grow in the short term and long term. The latter is usually easier to achieve and carries lesser risk than the former. 

If you are looking to grow your portfolio, there are several ways you can achieve that. Some investment-building strategies have more risks, and some take time before results begin to show. Here are seven of the tested strategies for growing your investments over time. 

Buying and Holding 

This strategy is a simple and effective one for building an investment portfolio over time. As an investor, if you buy stocks or other investment assets and simply hold on to them, regardless of short-term price fluctuations, you would most likely see immense growth in your portfolio with time. A significant advantage of this strategy is that it requires little monitoring. 

Timing the Market Correctly 

This investment strategy has more risks than buying and holding and, often, better returns. Investors who wish to use this strategy have to follow and correctly time the market. They have to know when prices are generally low to buy low and sell high. Investors could also concentrate on one investment asset instead of the general market with the same aim—to sell high and buy low. 

However, the strategy is only advisable for experienced investors who have enough time and knowledge about the asset in question or the general investment market. For new investors, it is advisable to go for other less time-intensive strategies. 

Diversifying Your Portfolio 

A diversified investment portfolio may drastically reduce the risks that come with investing. For instance, a diversified portfolio can reduce company risk, which is the risk attached to buying the stocks of one company. If one asset performs poorly in a diversified portfolio, the other assets will compensate for the loss. More often than not, investors combine diversification with the buy-and-hold strategy. 

As many studies have shown, asset allocation is an important strategy in diversification. Asset allocation is an investment strategy where investors determine the amount of their investment that goes into a particular asset category. Investors share their investments within different asset categories such as cash, bonds, and stocks, depending on their risk tolerance, time horizon, and financial obligations.

These categories have different risk and return levels. For instance, investors who want to go in for a long-term haul with fewer risks can do so with Treasury bonds. Those who are in for the short term can do so with cash equivalents and short-term Treasuries. Stocks and corporate bonds, on the other hand, have higher risks and return levels. So, an investor must carefully determine their financial goals, risk tolerance, and how long they wish to invest to properly allocate their investment to each category. 

After proper allocation, a portfolio also has to be adequately diversified. An investment portfolio with a mix of bonds, stocks, and cash has more chances of growth with less volatility and risk than one entirely invested in stocks.

Target Growing Industries 

Another excellent investment strategy is to invest in industries and sectors that have higher possibilities of growth. These include sectors like healthcare, construction, small-cap stocks, and technology. Investors who properly invest in these sectors can easily gain more returns compared to those who invest in more stable industries. However, they also face more risk and volatility. But even the risk can be reduced for investors who invest carefully and hold over time. 

Dollar-Cost Averaging 

Dollar-Cost Averaging is fairly popular with people that invest in mutual funds. For this strategy, investors designate a specific amount for one or more funds. This same amount is used to purchase the shares over time, no more, no less. This strategy protects investors from spending too much money when prices are high. It also helps them buy more when prices are low. 

As a result, investors that use this strategy get more returns over time since they buy low. Dollar-Cost Averaging also reduces the need to worry about market dynamics or market timing. 

Target the Dogs of the Dow

The Dogs of the Dow are the ten companies with the lowest dividend yields in the Dow Jones Industrial Average Index. Investors who purchase the stocks of these companies at the beginning of the year and make simple changes in their investment portfolio yearly may be able to beat the index’s returns over time. This has happened several times in the past, though it does not occur every year. This strategy is stipulated in Michael O’Higgins’ “Beating the Dow.”

Investors who cannot do their research on the “Dogs of the Dow” can purchase one of the many Unit Investment Trusts (UIT) or the Exchange-Traded Funds (ETF) that follow the same strategy. 

Follow the CAN SLIM Strategy 

Investor’s Business Daily’s founder, William O’Neil, developed an investment strategy with the acronym CAN SLIM. The acronym stands for: 

• C: stands for Current quarterly earnings per share, which O’Neil states should be around 18-20% higher than the previous year’s figure. 

• A: stands for Annual earnings per share, which should have shown material growth over the previous five years. 

• N: stands for New goings-on—which means that the company should have new products, services, management, or anything that can help sell the shares to the public. 

• S: stands for Shares outstanding, the number of a company’s shares held by all its shareholders. O’Neil states that a company that expects high profits in the future would be trying to repurchase its shares outstanding. 

• L: stands for Leader. A company that is a leader, not a laggard in its category, is worth investing in. 

• I: stands for Institutional sponsors. On this, O’Neil says a company should only have a few institutional sponsors, not too many.

• M: stands for the market. O’Neil says investors should also look at how the market affects the stocks they are purchasing. Investors should examine when a company’s stocks can be bought or sold to decide if it is worth investing in. 

The strategies mentioned in this article are some of the simplest strategies for building your investment portfolio. There are some other more advanced strategies that financial institutions and individual investors use to grow their portfolios. Some of these strategies use derivatives and other instruments to regulate the risk level and increase returns. A stockbroker or financial advisor can help you decide on the best strategy for building your investment portfolio. 

A few years ago, a series of advertisements from an investment firm portrayed individuals living it up with luxury products like expensive watches. They reminded the audience that they did the same thing as cheap watches: tell time.

“How are you spending your retirement?” asked the tagline. That is, unnecessary spending today equals less security tomorrow, and it’s wiser to invest instead (specifically through them).

Projecting your retirement spending is an essential component of retirement planning since it’s crucial to the question of when you’ll be financially ready to retire, as well as the linked concerns of income projection.

The most reliable retirement income for a federal retiree comes from annuities under CSRS or FERS and Social Security and other alternative sources such as military retired pay or a spouse’s pension from private sector work. Income from retirement savings plans such as the Thrift Savings Plan (TSP) is also included. In all circumstances, the nearer you are to retirement, the more accurate your income projection will be.

Regarding spending, conventional wisdom suggests that you’ll need around 70-80% of your pre-retirement income to keep your standard of living in retirement, assuming that some expenses will decrease.

Those “retirement confidence” studies are all about achieving a goal ratio of projected income to expected outgo.

Just keep in mind that this isn’t an exact science. According to a recent survey by the Employee Benefit Research Institute, “Savings regret — or sticker shock — among retirees is widespread: People wish they’d saved more when they confront future retirement expenses that they hadn’t fully considered prior, like long-term care.”

It stated that this helps explain why many people in all retirement income levels, including the most affluent, are hesitant to tap their savings more than they had planned to cover for unexpected expenses.

In general, retirees don’t want to spend down their own assets. Usually, this decision to keep the nest fund throughout retirement had to do with the uncertainty surrounding life and spending needs in retirement.

One study respondent cited her in-laws, “who have enough retirement funds to live comfortably yet would rather eat ramen noodles than squander their assets.”

Similarly, the Center for Retirement Research cites retiree research on why some retirees barely draw down their financial holdings throughout retirement. In reality, data suggests that many retirees’ assets keep growing long after they leave the workforce. This delayed (or negative) drawdown is perplexing, given that one of the primary goals of retirement savings in the lifecycle model is to supply consumption in old age.

One possible cause, according to the report, is knowing about potential costs, like long-term care. Others include the linked concern of “longevity risk” living far longer than predicted, increasing the likelihood of long-term care costs — and a desire to leave money to successors.

TSP investors’ conduct reflects this desire to protect savings. The major business stock C fund accounts for about 31% of total assets (excluding its portion of investments in the mixed lifecycle L funds). The ultra-safe government securities G fund has around 27%, not including L fund money invested in that fund.

However, for individuals aged 60 to 69 — late-career employees and early retirement period retirees — the figures are 38% G and 28% C. For retirees in their 70s and older (practically all retirees), they’re 43 and 28.

Is this an “issue?” No, not always. People are free to make decisions based on their best judgment.

However, the statistics imply that, because prospective long-term care expenses are among the top retirement spending concerns, more people may consider insuring against those expenses. They also emphasize the necessity of recognizing the worth of income streams that are guaranteed for life, such as Social Security and civil service annuities, which operate as a floor beneath which income will not fall.

Confidence in how you’ll spend your retirement funds is about more than simply money in and money out — it’s also about peace of mind.

Picking your investment choice is just the start of your investment venture. Generally, you'll need to continually note the performance of your investments to see how they're connecting in your portfolio to assist you with arriving at your goals. As a rule, progress shows that the worth of your portfolio is continually improving, regardless of whether at least one of your speculations has lost value. 

If your investments are not performing well, you'll need to determine why and choose what to do—for example, branching out into an alternate area of the economy or apportioning a percentage of your portfolio to global investments. To release funds for these new buys, you might need to sell specific investments that have failed to meet expectations.

What is the Status of My Investments?

To determine how well your assets are performing, you'll need to study a few unique approaches for checking execution. Suppose you're selling a stock quickly for a profit. In that case, you might be more concerned with whether the market price is growing, declining, or leveling.

Your investment options may be limited once your current bonds age if market rates are low. You might want to link current market rates to the interest earned on your bonds and certificates of deposit (CDs), as well as the return on your income-producing equities and mutual funds. You might even be persuaded to buy investments with a worse grade in the hopes of a higher return.

When evaluating the success of your investments, be sure you're not comparing one type to another. It's vital to find and use the appropriate asset assessment guidelines. If you don't, you might come to some unsatisfactory conclusions when evaluating the performance of your investment and the level of return.

Investment Return 

The amount of money you lose or make on investment is referred to as investment return. Add the change in substantial worth (positive or negative) from the time you purchased the investment to the entirety of the premium or dividend income you received from that investment to calculate your accumulated return, which is the most dependable measure of return. To calculate a percent return, divide the change in significant worth (value) added to the income by the amount you contributed.

The following is the equation for such calculation:

investment  sum = % return (Change in value + income) 

The computation is the same whether the stock's value falls or grows while you own it; the difference is when a loss is incurred; the return may be negative if the income on investment does not cover the decreased value.

It's important to remember that you don't have to sell the investment to make a profit. The return may be one of the most important factors to consider when deciding whether to maintain stock in your portfolio or sell it for one that appears to have a higher chance of doing better.

Suppose you plan to retain a bond until it matures. In that case, you may calculate your gross return by adding the principal you'll receive at maturity to the interest you'll earn during that time. If you sell the bond before it matures, you must account for the interest you received, the amount you received on the sale of the bond, and the price you paid for it. The amount you obtain from the bond deal is the same as the price you spent to purchase it.

Yield

Yield is commonly expressed as a percentage. The return on investment is divided by the investment price over a predetermined period, usually a year. Bonds, bank accounts, most mutual funds, and other investments all have yielded.

Yields on Bonds

When a bond is purchased at issue, its yield equals its financing cost or coupon rate. When buying bonds on the secondary market, the yield differs from the promoted coupon rate. Bond yields vary depending on the issuer's credit rating, the interest rate environment, and the market's overall demand for bonds. The bond’s secondary market cost determines the bond’s current yield.

Yields on Stocks

Divide a year's dividend depending on the stock's market price to get the yield on stocks. This information can be available on the internet, in your newspaper's financial section, and on your brokerage statement. Without a dividend yield, a stock has no value. However, suppose part of your investment goal is to achieve a mix of income and growth. In that case, you may have purposefully chosen stocks with a yield that is nearly as excellent as the market average. If you're buying a stock for its dividend yield, you should know how much money the company is paying out to investors. Stocks with the best yield are once given by corporations trying to keep a positive outlook regardless of monetary troubles. On the off chance that an organization doesn't recuperate, it might need to cut its profit, bringing down its yield. It's conceivable that the stock price will drop too. Remember that the money distributed as dividends are reserves that the firm isn't using to reinvest in its tasks. 

Investment Gains and Losses

Capital gains are normally taxed unless they are sold in a tax-free or tax-deferred account. The tax rate is calculated based on how long you keep the asset before selling it. Profits from the sale of an asset held for more than a year are taxed at a lower rate than regular income. Short-term gains are not eligible for this special tax treatment and will be taxed at standard income rates.

When it comes to capital gains, common assets, for example, differ from stocks and bonds. You should pay immediate or long-term capital gains taxes, just as you would with a stock or a bond. When the management of a shared asset sells safeguards within the asset, there is the possibility of an accessible capital addition (or misfortune).

Unrealized earnings and losses occur from changes in the market price of your investments while you have them but before you sell them. Only when you sell the investment do you realize the profit. If you do not sell the stock at the new higher price, you will lose your profit.

Unrealized gains and losses, as well as any income received by your investments, account for a large amount of what you consider when evaluating performance. Many financial press evaluations of success are purely based on price movements over time. Unrealized profits or losses determine the value of your portfolio.

You'll most likely consider investing as you begin to diversify your financial portfolio. Do you, however, pay taxes on your investments? What percentage of your budget should you set aside? Our advice covers some key aspects to keep in mind so you may invest with confidence.

Investing may be a fantastic option to maximize your assets, and what do you have to understand about filing your taxes? The answer is usually dependent on your unique circumstances.

Your investments at two points generally influence your taxes: 

• Receiving income on investments
• When investments are sold at a profit or loss

Just like every rule, there are exceptions. TurboTax would help in identifying what circumstances apply to you when completing your tax return. 

Income from investments

Interest and dividends are typically included in investment income. Interest and ineligible dividends are usually taxed at your regular income tax rate. On the other hand, certain dividends may be eligible for preferential tax treatment, with long-term capital gains tax rates as low as 5%. Your investment firm should be able to tell you whether or not your dividends are eligible.

Gains and losses from investment sales

When you sell an investment, you usually only have to pay taxes if you make a profit. To determine if you made a profit, deduct the cost basis of your investment, which is typically what you bought, from the sale.

If you made a profit on the transaction, you’d need to determine whether you owe taxes.

Depending on your position, you may be able to offset other profits or claim a deduction if you have a loss.

You must sell a capital asset to be eligible. The following are some instances of capital assets:

• your residence
• furniture for the home
• Stocks and bonds are examples of investments.

Capital gains may be divided into two categories. Short-term capital gains apply to assets held for less than a year. Normally, these profits are taxed at your regular income tax rate. Long-term capital gains refer to investments that you have held for longer than a year. Long-term capital gains tax rates are usually lower than conventional income tax rates, and they often top out at 20%.

Capital gains tax rates are greater for some types of investments. Like unique stamps, coins, paintings, and other items, collectibles are the most noteworthy exceptions. The capital gains tax rate on these sorts of investments may be as high as 28 percent.

Those with considerable income may be liable to the net investment income tax, an extra 3.8 percent tax on top of the regular capital gains taxes.

Whether you have any capital losses, you can use them to offset your capital gains. There are both long-term and short-term capital losses, just like long-term and short-term capital profits. It may appear complicated to balance your capital gains and losses, but here's how it works.

To begin, add up all of your financial gains and losses of the same sort. That is, short-term capital losses are subtracted from short-term capital profits, while long-term capital losses are subtracted from long-term capital gains. 

If you have either a short-term or long-term capital loss, you can offset your short-term losses with long-term earnings or vice versa.

Suppose you still have much more capital losses than capital gains per year. In that case, you can utilize up to $3,000 of any residual capital losses to offset your earned income in many accounting situations.

According to the regulations above, any excess capital losses exceeding that amount can be carried forward to future tax years to offset future income.

TurboTax will keep track of any carry-forward losses and apply them to future tax returns as long as you use it to file your taxes each year.

Certain investments may have special tax treatment.

Certain investments may be eligible for preferential tax treatment. Municipal bonds, for example, are usually tax-free for federal income taxes but may be taxable on your state tax return, depending on the location and which state issued the bond you purchased.

Certain taxes, such as the alternative minimum tax (AMT), can also be triggered by actions such as executing incentivized stock options.

Money in tax-advantaged retirement funds is a greater exception. Traditional retirement plans, such as an IRA or 401(k), may allow you to deduct your contributions today. After that, the account's investments can grow tax-free. When you make money in retirement after fulfilling the age criteria, it is usually considered regular income, and you will almost certainly have to pay ordinary income taxes.

Roth retirement accounts, such as a Roth IRA or Roth 401(k), are another form of a tax-advantaged retirement plan that is regarded differently (k). Contributions to these accounts do not qualify for a tax deduction. However, after fulfilling age and other conditions, the money can grow tax-free, and you can withdraw it tax-free, including investment profits, in retirement.

Other exclusions may apply based on your investments and circumstances.

Types of investments tax software can help with

It's simple to figure out how much tax you owe on your investments using accounting software. We'll ask you a few basic questions about your investments, and then we'll look up over 400 tax deductions to make sure you get every credit and deduction you're eligible for.

It's simple to figure out how much tax is owed on your investments with tax software. Here are a few of the most frequent investment kinds that it may assist with:

• A company's stock
• Municipal bonds are one type of bond.
• Mutual funds are a type of investment that allows you
• ETFs (exchange-traded funds) are a type of mutual (ETFs)
• Stock units with a limited supply (RSUs)
• Options on stocks are a type of investment.
• REITs are a type of real estate investment trust (REITs)
• Real estate for rent
• A house is being sold
• Cryptocurrency
• A retirement account's investments
• Rare stamps, coins, paintings, and other collectibles are available.

Combating the Threats of Inflation in Retirement

It is not uncommon now for Americans to retire for two, three, or even four decades. This means that folks will have plenty of time to unwind and fulfill their bucket list goals. On the other hand, retirees must ensure that they have sufficient savings to survive for the rest of their lives. One complicated element is that inflation is unavoidable, and it can lead to significant increases in costs over time.

Inflation rates are at an all-time high, as you've probably noticed in recent news. According to the Consumer Price Index 1, living expenditures increased 5% in the 12 months ended in June, much more than the 1-2 percent yearly rises we've become accustomed to over the past decade.

Inflation is a struggle for all consumers, but it is especially difficult for retirees who are living on a fixed income. Higher inflation can throw off your retirement plan's calculations for normal costs. Although it's unclear whether this rise in living costs will continue, you should plan for the effects of inflation anyway. Here are some things to be aware of and to do:

Keep Everything In Perspective.

The current inflation rate of 5 percent is high by recent standards, but not unprecedented. We may be a long way from another period of high inflation like the 1970s and 1980s, when inflation in the US peaked at 13.5 percent. Inflation has only topped 5% once in a calendar year since 1982, and that was in 1991. While another decade of inflation is improbable, living costs may continue to climb rapidly in the near future.

Examine Your Expenses Once More.

If the cost of basic things like food and gas, as well as discretionary spending like travel, is breaking your budget, you may need to look for methods to save. Is it possible to buy food in bulk to save money? Should you cut back on your casual driving in order to save money on gas? Are there any additional luxuries you may forsake for the time being? By answering these questions now, you may be able to avoid depleting your assets too soon.

Make Changes To Your Investments.

Is your investment portfolio well-positioned to keep up with inflation? Investing a portion of your assets in stocks may make sense. The S & P 500, a measure of large-cap stock market performance in the United States, has gained more than 10% yearly on average during the last 30 years, well above the 2.3% average annual rate of inflation. Higher returns on money you'll need in 10 to 20 years should help it grow enough to satisfy inflated income needs then, but a major percentage of your portfolio should still be placed cautiously to safeguard it from market volatility.

Consider Other Methods For Improving Your Situation.

If rising living costs are putting a burden on your finances, investigate other choices such as part-time employment or consultancy. Even in retirement, it's critical to have flexibility in order to respond to changing circumstances that may disrupt even the best-laid plans. Check with your financial advisor to evaluate your best options for dealing with today's inflation issues.

Retired military pay is the monthly annuity payment for veterans who meet certain requirements. It is also known as High 36 or military retired pay. To qualify for this, service members have to stay in service for a minimum of twenty years. Since the minimum years of service is twenty years, some people choose to return to federal employment as a civilian while still receiving their retired military pay. People who choose this option will have reduced annuities upon retirement from civilian service. 

However, there is also the option of waiving the pay and having the years spent in military service count towards the federal annuity computation for the period of civilian service. 

In two rare cases, federal employees can keep both payments. They can continue receiving their retired military pay and still be eligible for their federal annuity payments without any deductions. These cases are: 

• Former service members who retire from a reserve component of the United States Armed Forces. 

• Former service members who are receiving retired pay as a result of a service-connected disability. The pay can be granted in connection to two forms of service-connected disabilities. The first is one gotten from a combat situation with an enemy of the US, and the other is a disability obtained while discharged from one’s duties during a war. 

The law allows people in either of these categories to continue receiving their retired military pay while still in federal employment and both the pay and annuity upon their second retirement. 

More details about this are contained in the retirement application form. When you fill out the form, you have to read through and carefully check the appropriate boxes in the Schedule B ̶  Military Retired Pay section. If you already receive or wish to apply to start receiving the military retired pay or retainer pay, you should check the appropriate boxes.

Also, suppose you fall in either of the two categories stated above and are eligible to keep receiving your retired military pay plus your annuity. In that case, you should also check the appropriate boxes for your category. You would also need to attach proof of the legitimacy of your claim. This is a copy of your notice of award.

The Office of Personnel Management (OPM) needs this proof to process your application for retirement. Though the issue can be cleared if your branch of service sends verifies your claim with the OPM. However, this takes time and can delay you from receiving your annuity payments at the right time. 

To avoid all unpleasantness when filing for retirement, ensure you have all appropriate documents sorted out months before you will need them. If you fall in the first category and have a reservist notification of entitlement for retired pay, make a copy of the document. When it is time to fill out your civilian retirement application, you have it handy to attach. 

In the same vein, if you retired based on a service-connected disability, get copies of all relevant documents ready to be attached to your retirement application.  If you are having problems with the required documents, you can contact your agency’s personnel office for help. It would point you in the right direction to get the required documents for your situation. 

It is much easier to deal with your agency than the OPM when you are facing the issue of dual credit for previous military service. Your agency will not require any proof of entitlement to estimate your civilian retirement annuity. It already has all it needs to process your retirement application form as soon as you file it. The case is different for the OPM, so get all documents ready to avoid any unpleasant delays in the process. 

Bottom Line

Many factors come to play when it comes to getting a previous military service to count towards your civilian annuity computation. For some veterans, it is only possible to receive a portion of the annuity while still receiving the retired military pay. For others, reservists and those with service-connected disabilities, the law gives room for dual credit. People in this category get credited for both military and civilian service and can live out their lives receiving monthly payments for both. 

As such, you must understand the intricacies of both situations and know that which applies to you. This would help speed up things when you are applying for retirement from civilian service and save from unnecessary stress. It would also help you know which documents you would need while filling out your retirement form.

 If anything still looks unclear, you can contact your agency’s personnel office for help.

Contact Information:
Email: [email protected]
Phone: 5167611515

Like all retirement benefit plans, Social Security rewards the one who’s patient. Though you can start receiving the payment earlier, it is best to wait until your full retirement age before you start receiving the benefit. People who wait could receive between 5 to 8 percent more money than those who do not. That’s more money to enjoy your retirement years without doing anything other than just waiting. However, it is not without risk. 

The full retirement age is not the same for everyone, but it is between 66 years to 67 years for most people. Here is a complete breakdown for more clarity: 

• For people born before 1938, the full retirement age is 65. 

• For people born in 1938, it is 65 years and two months. 

• For people born in 1939, it is 65 years and four months. 

• For people born in 1940, it is 65 years and six months. 

• For people born in 1941, it is 65 years and eight months. 

• For people born in 1942, it is 65 years and ten months.

• For people born between 1943 and 1954, the FRA is 66 years. 

• For people born in 1955, it is 66 years and two months. 

• For people born in 1956, it is 66 years and four months. 

• For people born in 1957, it is 66 years and six months. 

• For people born in 1958, it is 66 years and eight months. 

• For people born in 1959, it is 66 years and ten months. 

• For people born in 1960 and later, the FRA is 67 years. 

As you can see from the chart, the FRA for most people is between ages 66 and 67. Only very old people will fall in the categories before that. 

If you retire at 62 or even before that, you can start receiving your Social Security benefits immediately after you are 62. However, you won’t be eligible for the same monthly payments as you would have if you had waited until your FRA or age 70. While you can get more if you wait till 70, not waiting until your full retirement age will mean a reduction in your benefits. 

For the first thirty-six months that you start receiving the benefits before your FRA, there will be a 5/9 of 1% deductions in your benefits. The deductions amount to 6 2/3% every year for those first three years. After the initial thirty-six months, the deductions become 5/12 of 1%  for every month until you attain your full retirement age. The deductions amount to 5% deductions every year until your full retirement age. 

For further clarity, here is a quick breakdown of deductions if your full retirement age is 67 and you opt to start receiving your benefits before you 67: 

• If you take your benefits at 62, it would be reduced by 30%. 

• If you take it at 63, it would be reduced by 25%. 

• If you take it at 64, it would be reduced by 20%. 

• If you take it at 65, it would be reduced by 13.3%. 

• If you take it at 66, it would be 6.67%. 

The more you delay receiving your Social Security, the more money you will receive. 

It is best to wait until your full retirement to make the best of your Social Security benefits. Doing this can earn you delayed retirement credits of 8% every year from your full retirement age until 70. For instance, if your FRA is 70, you would have three years until you are 70. If you wait till then, Social Security will multiply the 8% by three, giving you a 24% increase on your benefits. 

However, like all investment strategies, there are risks attached to this strategy. Waiting comes with the risk of dying before you collect as much as you have contributed to the plan or before you even start receiving the payments altogether. There are different percentages used to determine the break-even point, but many experts agree it takes around 12 years. So, everyone who wants to wait until after their FRA or 70 should factor in the 12-year yardstick. 

Unfortunately, the risk of death is universal, and there is no way to estimate how long one would live. But the decision to take the risk or not is totally in your hands. If you think you will have much more time after your FRA to receive what you put into the welfare plan or more, then go for it. Wait until your FRA or longer to make the best of your Social Security. However, if your think you will not have that much time, you should start receiving your monthly benefits as soon as the law permits. 

Before you make your decision, you should note that you need another source of income that can supplement whatever you receive from your TSP and federal annuity while you delay receipt of your Social Security. 

Whether you’ve just begun or are towards the end of your career, you may still potentially increase the size of your nest egg.

When it comes to retirement planning, the reality is that the earlier you begin saving, the better off you may be, owing to the magic of compound interest. Even if you started saving late or have yet to start, it’s essential to know that you’re not alone and that there’re actions you can take to increase your retirement savings. “It’s never too late to begin,” says Debra Greenberg, Director of Retirement and Personal Wealth Solutions at Bank of America.

Consider the following suggestions to help you increase your savings—regardless of your current life stage—and seek the retirement you desire.

1. Focus on starting now

Start saving as much as you can now, especially if you’re just starting to save for retirement, and give compound interest—the capacity of your assets to generate profits, which are reinvested to generate their own earnings—a chance to work to your advantage. The sooner you begin, the better off you’ll be.

Starting early can help with the end result, even if investing a modest amount.

By starting to save money early, a 25-year-old investing $75 each month acquires greater assets by the age of 65 than a 35-year-old investing $100 per month—despite investing less each period. Investing a modest amount over a longer time framework could have a more significant impact on investment results than investing a larger amount over a shorter time horizon.

*PICTURE*

2. Make 401(k) contributions

If your workplace provides a traditional 401(k) plan and you’re eligible, you may be able to contribute pre-tax funds, which can be a considerable benefit. Assume that you are in the 12% tax rate and intend to allocate $100 every pay period. Since that money is deducted from your paycheck before federal income taxes are calculated, your take-home pay will be reduced by just $88 (plus the amount of applicable state and local income tax and Social Security and Medicare tax). That means you could invest more of your income without it affecting your monthly budget much. If your employer provides a Roth 401(k) plan, which uses after-tax funds rather than pre-tax income, you should consider your income tax bracket in retirement to determine whether this is the best option for you. Even if you quit that company, you have options on what to do with the 401(k) account.

3. Meet your employer’s 401(k) match

If your firm offers to match your 401(k) plan contributions, make sure you contribute enough to take full advantage of the bonus. A company, for example, may offer to match 50% of employee contributions up to 5% of your wage. That is, if you make $50,000 per year and pay $2,500 to your retirement plan, your employer will contribute an additional $1,250. It’s basically free money. Don’t just leave it there.

4. Open an IRA

Think about opening an individual retirement account (IRA) to supplement your retirement savings. Based on your income, and if you and/or your spouse have an employer retirement plan, a Traditional IRA may be a good choice for you. Traditional IRA contributions can be tax-deductible, and investment gains may grow tax-deferred until withdrawals are made during retirement. However, if you satisfy the phased-out income restrictions based on your federal tax filing status, a Roth IRA might be a smart option for you. Since they’re funded with after-tax contributions, so after you turn 59½, qualified distributions, including profits, are federally tax-free (and might be state-tax-free) if certain holding period criteria are met. Find out which IRA is best for you and check the most recent 401(k) and IRA contribution limitations.

5. If you’re 50 or older, you can take advantage of catch-up contributions

One of the reasons it’s critical to start saving as soon as possible is because annual contributions to IRAs and 401(k) plans are restricted. The good news? When you reach the age of 50 in a calendar year, you are entitled to make catch-up contributions to IRAs and 401(k)s that exceed the regular limitations. So, if you haven’t been able to save as much as you would have wanted over the years, catch-up contributions can help increase your retirement funds.

6. Make your savings automatic

You’ve most likely heard the expression “pay yourself first.” Make your monthly retirement payments automated, and you’ll have the chance to potentially increase your nest egg without having to worry about it. You can use the Merrill Automated Funding Service to make recurring contributions to your Merrill IRA from another Merrill, Bank of America, or other financial institution accounts. The Merrill Automatic Investment Plan, which invests money automatically in specified funds, can also help you automate your investment selection.

7. Cut back on spending

Examine your financial situation. You might negotiate a lower auto insurance rate or save money by taking your lunch to work instead of buying it. Merrill offers a cash flow calculator that may help you figure out where your money is going—and where you might cut back, so you have more money for saving or investing.

Your contribution rate: a little extra can go a long way.

The sum you contribute to your retirement plan now can have a significant impact on how much money you have when you’re ready to retire. Simply boosting your contribution rate from 4% to 6% may contribute more than $101,000 to your nest egg over 30 years (assumption: a $50,000 salary).

*PICTURE*

8. Set a goal

Knowing how much you could need might help you not only comprehend why you’re saving, but it can also make it more rewarding. Set milestones along the way to obtain satisfaction as you work toward your retirement goal. Use the Personal Retirement Calculator to see when you might be able to retire and how much you’ll need to invest and save to get there.

9. Stash extra money

Got extra money? Don’t just spend it away. Increase your contribution percentage every time you get a raise. Allocate at least half of the new funds to your retirement account. Although it might be tempting to spend a tax refund or salary bonus on a new designer piece or a vacation, financial planners advise not to regard those extra dollars as found money. They suggest that you treat yourself to something modest and use the rest of your money to help you make larger strides toward your retirement goal.

10. As you are nearing retirement, consider deferring Social Security

“This is a huge one,” says Greenberg. “For every year you postpone receiving a Social Security benefit before reaching 70, you can raise the amount you receive in the future.” The earliest you may start receiving Social Security retirement benefits is at the age of 62. However, for each year you wait (until the age of 70), your monthly payment increases, and the extra income adds up rapidly. Even a one-year delay in retiring may make a huge impact. Furthermore, it may also boost your spouse’s future survivor benefits.

The first step is to recognize the need to save money for retirement. Decide how much you want to save for retirement and come up with creative ways to boost your contributions. A typical regret among retirees is starting too late and saving too little. Making an effort now will allow you to look forward to retirement.

This article delves into tax choices such as dividend tax, interest tax, capital gains tax, and how harvesting tax losses can minimize capital gains tax.

Dividend tax

You are undoubtedly aware that firms pay dividends after paying tax on their original profits as business owners. This is why on “qualified dividends,” owners in the United States or nations with which the United States has a double-taxation treaty receive a preferential maximum tax rate of 20%.

On the other hand, foreign corporations and companies that get non-qualified income pay conventional income tax rates, which are typically higher.

According to the Internal Revenue Service (IRS), shareholders can only profit from the preferred tax rate if they have held shares for at least 61 days during the 121 days beginning 60 days before the ex-dividend date. Those days do not count against the minimum holding time when the shareholder’s risk of loss is decreased,

In the case of an investor who pays a marginal federal income tax rate of 35% and has a taxable account with a tax liability of $100, he receives a $500 dividend on stock. The tax rises to $175 if the necessary holding rate is not attained or the dividend is not qualified.

Investors that have assets in a deferred account such as taxable bonds, overseas stocks, and a conventional brokerage account where they keep domestic stock have decreased their tax burden.

Interest tax

Most interests are taxed by the federal government as ordinary income, depending on the investor’s marginal rate.

Interest bonds issued by states and municipalities in the United States are tax-free. Investors may also be exempt from state income taxes on interest. Most states do not charge interest on municipal bonds issued by in-state entities.

Municipal bonds are preferred by investors subject to higher tax brackets over other bonds in their taxable accounts. Municipalities with lower nominal interest rates typically give investors a larger after-tax return on tax-exempt bonds than firms with similar credit ratings.

Consider an investor who pays a marginal federal income tax rate of 32% and receives $1,000 in semi-annual interest on a $40,000 principal amount of a 5% corporate bond but owes $320 in taxes. If an investor receives $800 in interest on a $40,000 principal amount of a 4% tax-exempt municipal bond, then no federal tax is due on the $800.

Tax on Capital Gains

Investors cannot avoid paying taxes by investing in mutual funds, exchange-traded funds, real estate investment trusts, or limited partnerships. Because of the tax character of dividends, investors are still subject to capital gains tax when they sell.

Research shows that the tax on realized capital gains is based on how long the investor has owned the security. Long-term gains (greater than a year) are taxed at a rate of 0%, 15%, or 20%, depending on your taxable income and filing status. Days do not count if the investor has minimized risk by using options or short sales, just as they do for eligible dividends. Short-term capital gains (those held for less than a year) are taxed at ordinary income tax rates, often higher.

In the case of a 24% tax bracket, an investor selling 100 shares of XYZ stock for $80 each after obtaining them for $50 each—if they owned the stock for more than a year and are in the 15% capital gains bracket, the tax due would be $450 (15 percent of ($80 – $50) x 100), compared to $720 if they only held it for a year.

Wash Sales and Tax Losses

Investors can lower their capital gains tax liability by harvesting tax losses. For instance, if one or more stocks in an investor’s portfolio fall below their cost basis, the investor can sell and realize a tax loss.

Capital gains can be offset by capital losses incurred in the same tax year or carried over from previous years. Individuals can deduct up to $3,000 in net capital losses from their other taxable income each year. Any losses that exceed the tolerance can be used to offset gains in the future.

The federal income tax brackets for 2020 and 2021 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, dependent on the annual income.

However, there is a catch. The IRS considers a “wash sale” when a “substantially similar” security is sold and repurchased within 30 days, and the capital loss is forgiven for the current tax year. Instead, the loss improves the tax basis of the new position, deferring the tax payment until the stock is sold in a non-wash sale. The same stock, in-the-money call options, and short put options on the same stock are all deemed substantially comparable securities but not shares in another company in the same industry.

An investor in the 35% tax bracket, for example, sells 100 shares of XYZ stock purchased at $60 per share for $40 per share, a $2,000 loss, and sells 100 shares of ABC stock purchased at $30 per share for $100 per share, a $7,000 profit. Taxation is due on the $5,000 net gain. The rate is decided by how long ABC has been held—$750 for a long-term gain (if taxed at 15%) or $1,750 for a short-term gain (if taxed at 15%).

If the investor buys back 100 shares of XYZ within 30 days of the original transaction, the capital loss on the wash sale is rejected, and the investor must pay tax on the entire $7,000 gain.

Conclusion

Taxes are subject to change and can have a significant impact on an investor’s net return. Dividends, capital gains, and wash sales are all covered in detail on the IRS‘ website. Given the intricacy of these rules, investors should seek the guidance of their own financial and tax advisors to determine the best strategy for their investment goals and ensure that they are properly reporting their taxes.

Contact Information:
Email: [email protected]
Phone: 3604642979

Disclosure:
Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.

Confidential Notice and Disclosure: Electronic mail sent over the internet is not secure and could be intercepted by a third party. For your protection, avoid sending confidential identifying information, such as account and social security numbers. Further, do not send time-sensitive, action-oriented messages, such as transaction orders, fund transfer instructions, or check stop payments, as it is our policy not to accept such items electronically. All e-mail sent to or from this address will be received or otherwise recorded by the sender’s corporate e-mail system and is subject to archival, monitoring or review by, and/or disclosure to, someone other than the recipient as permitted and required by the Securities and Exchange Commission. Please contact your advisor if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Additionally, if you change your address or fail to receive account statements from your account custodian, please contact our office at [email protected] or 800-779-4183.

Financial stability in retirement does not simply happen. It requires planning, dedication, and, of course, money.

Facts 

• Only 40% of Americans have estimated how much money they’ll need to save for retirement.
• In 2018, almost 30% of private-sector workers who had access to a defined contribution plan (like a 401(k) plan) didn’t participate.
• The average American spends around twenty years in retirement.

We can all make a habit out of putting money aside for retirement.

Remember: Saving is Important!

1.  Start saving, continue saving, and stick to your goals

Continue to save if you’re already doing so, whether for retirement or another purpose. You’re aware that saving is a rewarding habit. If you aren't already saving, now is the time to start. Start small if necessary, and gradually raise the amount you save each month. The earlier you start saving, the longer your funds can grow (see the chart below). Make retirement saving a top priority. Create a strategy, adhere to it, and set goals. It can never be too soon or too late to start saving.

2. Determine your retirement needs

Retirement is not cheap. Experts estimate that when you quit working, you’ll need 70 to 90 percent of your preretirement income to keep the same living standard. Take control of your financial situation. Preparation is the key to a secure retirement. Begin by obtaining Savings Fitness: A Guide to Your Money and Your Financial Future, as well as Taking the Mystery Out of Retirement Planning for those nearing retirement. (If you’re interested in a copy, see the back panel.)

3. Contribute to the retirement savings plan offered by your employer

Sign up for and contribute as much as you can to any retirement savings plan offered by your employer (like a 401(k) plan). Not only you'll lower your taxes, but your employer may contribute more. Also, automated deductions will make it simple. Compound interest and tax deferrals make a significant impact on the amount you will amass over time. Learn more about your strategy. For example, how much would you have to contribute to receive the total employer contribution, and how long would you have to participate in the plan to receive that money.

4. Inform yourself about your employer’s pension plan

If your employer offers a traditional pension plan, check whether you’re covered by it and understand how it operates. Request an individual benefit statement to estimate your benefit's value. Before changing jobs, find out what will happen to your pension benefit. Learn about any perks you may have from previous employment. Find out if you’re eligible for benefits under your spouse's plan. If you want to learn more, check What You Should Know About Your Retirement Plan. (For further details, see the back panel.)

5. Consider fundamental investment principles

The way you’re saving can be as important as the amount you’re saving. Inflation and the types of investments you make will significantly impact the amount of money you'll have saved when you retire. Understand how your funds or pension plan is invested. Learn about the investment options of your plan and ask questions. Put your funds in a variety of investments. You’re more likely to decrease risk and increase return by diversifying in this way. Your investment mix might change over time depending on a variety of factors like your age, aspirations, and financial situation. Financial stability and knowledge are strongly intertwined.

6. Don’t tap into your retirement savings

If you take from your retirement funds now, you will lose principal and interest, and you may forfeit tax advantages or face withdrawal penalties. If you change employment, keep your savings invested in the current retirement plan. You can also roll them over to an IRA or your new employer's plan.

7. Ask your employer to start a retirement plan

If your employer doesn’t have a retirement plan, recommend that it establish one. There are several retirement savings plans available. Your company may be able to devise a simplified plan that will benefit both you and your employer. Read Choosing a Retirement Solution for Your Small Business for more information. (For further details, see the back panel.)

8. Contribute to an Individual Retirement Account (IRA)

The maximum contribution per year to an IRA is up to $6,000; and, if you’re 50 or older, you can contribute even more. You can even begin with much less. IRAs also offer tax benefits. When you open an IRA, you can choose between a traditional IRA and a Roth IRA. Your contributions and withdrawals will be taxed differently depending on the plan you choose. Also, inflation and the type of IRA you select will determine the after-tax value of your withdrawal. IRAs are an easy and straightforward way to save. You can have it set up to automatically withdraw money from your checking or savings account and placed it into your IRA.

9. Learn about your Social Security benefits

After retirement, Social Security retirement benefits replace around 40% of a median wage earner's income. You might be able to estimate your benefit by visiting the Social Security Administration's website and using the retirement estimator. Visit their website or contact 1-800-772-1213 for additional information.

10. Ask Questions

While these suggestions are intended to guide you in the right direction, you’ll require more information. Check out our publications, which are listed on the back panel. Speak with your employer, bank, union, or financial consultant. Ask questions and make sure to understand the answers. Get practical advice and take action right away.

Contact Information:
Email: [email protected]
Phone: 3604642979

Bio:
After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.

Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.

Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.

Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.

Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.

With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.

Aaron can help you and your family to create, preserve and protect your legacy.

That’s making a difference.

Disclosure:
Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.

Confidential Notice and Disclosure: Electronic mail sent over the internet is not secure and could be intercepted by a third party. For your protection, avoid sending confidential identifying information, such as account and social security numbers. Further, do not send time-sensitive, action-oriented messages, such as transaction orders, fund transfer instructions, or check stop payments, as it is our policy not to accept such items electronically. All e-mail sent to or from this address will be received or otherwise recorded by the sender’s corporate e-mail system and is subject to archival, monitoring or review by, and/or disclosure to, someone other than the recipient as permitted and required by the Securities and Exchange Commission. Please contact your advisor if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Additionally, if you change your address or fail to receive account statements from your account custodian, please contact our office at [email protected] or 800-779-4183.

Are you planning to retire within the next ten years?

Taking these steps now might help you strengthen your portfolio as you near target your retirement date.

After decades of working and saving, you're finally getting close to retirement. But this is not the time to relax. If you want to retire within the next ten years or so, consider taking these steps now to ensure that you have all you need to live a pleasant retirement lifestyle. Assessing your income sources well in advance of your planned retirement date allows you to make any necessary modifications quickly.

Start by imagining the retirement kind you want. Will you be working part-time, volunteering, or traveling? Next, create a realistic image of the financial resources you may require, and then determine whether your current ones will be enough to fund your plan. If you discover a gap, consider acquiring the additional assets you need or adapting your vision to meet your resources. By reviewing your existing costs, you may be able to find discretionary things that could be removed or decreased. If you look at everything you bought over the course of one month, you might be shocked at how much you can cut down to have more money to invest for your retirement.

Here're some things to think about when you're around ten years away from retirement.

1. Ensure that you’re diversifying your investments and investing for growth

While it may be tempting to avoid stocks in order to decrease risk, the growth that stocks may bring is still significant at this period of your life. Consider keeping a healthy mix of stocks, bonds, mutual funds, and other assets that correspond to your risk tolerance, investment time framework, and liquidity needs.

Examining your income sources well before retirement allows you to make any necessary adjustments to your plans.

A well-balanced portfolio can help you weather market downturns and perhaps create the type of income you'll need to cover costs in a retirement that might last more than three decades. To ensure that your portfolio is in accordance with your investment goals for your retirement plan, use the Merrill Edge Asset AllocatorTM. Please keep in mind that diversification doesn’t guarantee a profit or protect against loss in weak markets.

2. Maximize the use of retirement accounts, particularly catch-up contributions

Increase your retirement contributions whenever possible, up to the maximum allowed in your 401(k), IRAs, or other retirement programs. Aim to contribute enough to your 401(k) to be eligible for any maximum matching contribution your employer offers. If you're 50 or older at any point throughout the calendar year, regulations for catch-up contribution allow you to set aside more than the standard contribution.

Consider account consolidation as you approach retirement, including merging IRAs of the same kind with one institution. That could simplify your investment management and provide you a better picture of your total retirement assets. Also, check any 401(k) accounts you may still have with past employers and learn more about 401(k) distribution options and other job-related consolidations. Evaluate the benefits and drawbacks before deciding. It may also be beneficial to consult with a tax specialist. View the latest recent contribution limitations for 401(k)s and IRAs.

3. Reduce your debt

Think about increasing your mortgage payments so that you can pay off the loan before you retire. Paying cash for significant purchases might help you avoid incurring additional credit card debt. You can reduce the amount of retirement income spent on interest payments by limiting new debt and decreasing existing debt. "Paying off a credit card that has a 15% interest rate is like getting 15% on a risk-free investment," says Anil Suri, managing director in Bank of America's Chief Investment Office.

4. Determine your likely retirement income

Calculate your predictable income from sources like Social Security and employee pensions. The remainder of your retirement funds will most likely have to come from your earnings, savings and investment accounts, and any salary earned in retirement. The old rule of thumb for ensuring your assets last your lifetime was that you could afford to spend 4% of your portfolio yearly in retirement. So, if you have $1 million in retirement funds, you may expect to afford to spend around $40,000 of that amount each year when you retire. When combined with your other assets, Social Security, and pensions, is it enough to fund the retirement you desire? "Four percent is a reasonable starting point," Suri adds, "but it may also be too simple." "Your individual withdrawal rate should be tailored and based on a number of criteria, like age, gender, and risk tolerance."

The benefit of considering these income sources far in advance of retirement is that it’ll give you more time to alter your plans if required. Some options for increasing your retirement savings are:

• Putting off retirement and working longer
• Lowering your discretionary spending
• Delaying Social Security payments (each year you defer, your monthly benefits grow by 8 percent, until age 70)

The longer you wait to tap into your retirement nest egg, the longer your savings will likely last.

5. Calculate your retirement expenses

Some costs, like health care, may rise later in life, while others, like transportation and clothes, may fall. What you spend will be determined by how you live in retirement. For example, if you want to travel a lot, your estimated expenses may be higher than they are now while you are still working.

6. Think about future medical expenses

If you retire at 65 or older, Medicare will cover most of your routine healthcare expenses; but, you might want to consider supplementary coverage to help pay for your nonroutine healthcare costs, which are expected to grow as you age. Furthermore, Medicare doesn’t cover the majority of long-term care expenses. Learn more about how to plan for healthcare expenses in retirement.

Consider getting long-term care insurance to help preserve your retirement nest egg. This insurance can help with some expenses, like home health aides. If you get coverage now, your rates will be lower than if you wait several years, and you’ll be less likely to be turned down by insurers.

If you have a health savings account, think about contributing the maximum amount. Although the money is tax-advantaged, payouts may be subject to income tax and penalties if not used for qualifying medical expenditures. Money that you don't spend can grow tax-free compounding until you need it in retirement.

7. Plan where you’ll live

The location of your retirement might have a significant impact on your costs. For instance, if you sell your house in a high-priced area and relocate to a condo in a low-tax state, your costs may fall sharply, potentially freeing up cash for other purposes. You might also consider staying in your town or city but moving to a smaller home that’s easier to manage financially. On the other hand, you may want to reside in an area with high living expenses and taxes in order to be close to grandkids or move to a cosmopolitan metropolis – a decision that may need cost-cutting measures.

It's never too late to start

When your projected retirement date is a decade away, it may seem very far. However, it’s critical to plan properly and establish reasonable objectives so that time works in your favor and you have the resources to enjoy the retirement you have always desired.

Even if you began saving and investing for retirement late or haven’t begun yet, it’s essential to know that you’re not alone and that there’re actions you can take to boost your retirement savings. "It's never too late to start," adds Greenberg.

Retirement planning is a multi-step process that develops over time. For a comfortable, secure, and enjoyable retirement, you must first establish the financial cushion that will cover all that. The enjoyable part is why its essential to pay attention to the serious, and maybe dull, part: figuring out how to get there.

The first step in retirement planning is thinking about your retirement objectives and how long you have to accomplish them. Then you should look into the many sorts of retirement accounts that could help you raise funds to support your future. You must invest the money you save for it to grow. The last surprise is taxes: If youve got tax deductions for the money youve contributed to retirement accounts over the years, youll face a significant tax charge when you start taking those funds. There are ways to reduce the retirement tax impact while saving for the futureand to continue the process after that day arrives and you do retire.

Well go through all of these issues here. But first, understand the five steps that everyone, regardless of age, should follow to create a good retirement plan.

KEY TAKEAWAYS

• Retirement planning should include establishing time horizons, estimating costs, calculating necessary after-tax returns, assessing risk tolerance, and preparing an estate plan.
• Begin preparing for retirement as soon as possible to capitalize on the power of compounding.
• Younger investors can afford to take more significant risks with their assets, while those nearing retirement should be more careful.
• As retirement plans develop over time, portfolios should be rebalanced, and estate plans should be revised as appropriate.

1. Understand Your Time Frame

Your present age and projected retirement age lay the basis for a successful retirement strategy. The more the time elapsed between now and retirement, the greater the degree of risk your portfolio can tolerate. If youre young and have more than thirty years until retirement, you should put the majority of your money into riskier investments like stocks. Despite volatility, stocks have historically outperformed alternative assets, like bonds, over extended periods. The keyword here is long, which means at least ten years.

You also need returns that outperform inflation to keep your purchasing power in retirement. Think of inflation as an acorn. It starts tiny, but with enough time, it may grow into a massive oak tree. Weve all heard about, and desire, compound growth on our money. On the other hand, inflation is a form of compound anti-growth, as it erodes your moneys value. For 24 years, a relatively low inflation rate of 3% will destroy the value of your savings by 50%. It may not appear to be much each year, but over time, it has a significant impact, according to a financial advisor.

You may not think that saving a few dollars here and there in your twenties means a lot, but the power of compounding will make it much more valuable by the time you need it.

Generally, the older you are, the more your portfolio should be geared toward income and capital preservation. That means a greater allocation to assets such as bonds, which may not produce the same returns as stocks but have less volatility and generate income that can be used to live on. Inflation will also be less of a concern for you. A 64-year-old who plans to retire next year doesnt have the same concerns about rising living costs as a much younger professional who has recently entered the field.

You should divide your retirement strategy into several components. Assume a parent wishes to retire in two years, pay for a childs schooling at 18, and relocate to California. From the standpoint of developing a retirement plan, the investing approach would be divided into three phases: two years until retirement (contributions are still made to the plan), saving and paying for college, and living in California (regular withdrawals to cover living costs). To establish the best allocation approach, a multi-stage retirement plan must consider multiple time horizons and the corresponding liquidity needs. You should also rebalance your portfolio when your time horizon changes.

2. Determine Your Retirement Spending Needs

Having realistic expectations regarding post-retirement spending patterns will help you determine the appropriate size of a retirement portfolio. Most individuals assume that after retirement, their annual spending will be just 70% to 80% of what they spent before. Such an assumption is usually unrealistic, particularly if the mortgage has not been paid off or unexpected medical costs. Retirees may also spend their initial years of retirement spending on travel or other bucket-list items.

I think that the ratio should be closer to 100 percent for retirees to have enough funds for retirement, says David G. Niggel, the CEO of Key Wealth Partners, LLC. Each year, the cost of living rises, particularly health-care costs. People are living longer lives and wish to thrive in their golden years. Retirees require higher income for a longer time; therefore, they must save and invest accordingly.

Since retirees dont work for eight or more hours per day anymore, they have more time to travel, go sightseeing, shop, and indulge in other costly hobbies. Accurate retirement expenditure targets help in the planning process since more spending in the future requires extra savings today.

Your withdrawal rate is one of the most important factors in the longevity of your retirement portfolio. Its critical to estimate your retirement expenses accurately since itll impact how much you withdraw each year and how you invest your account. If you understate your costs, youll easily outlive your portfolio; or if you overstate your expenses, you may not be able to enjoy the sort of retirement lifestyle you desire, says Kevin Michels, a financial planner and president of Medicus Wealth Planning. When planning for retirement, you should also consider your longevity to dont outlive your funds. The average life expectancy is increasing.

Individuals and couples longevity rates can be estimated using actuarial life tables (referred to as longevity risk).

Furthermore, if you plan to buy a home or support your childrens education after retirement, you may need more money than you think. These expenses must be incorporated into the overall retirement plan. Remember to revise your plan at least once a year to ensure youre on track with your savings. You can improve retirement-planning accuracy by specifying and estimating early retirement activities, accounting for unexpected costs in middle retirement, and considering what-if late-retirement medical expenses, says Alex Whitehouse, president and CEO of Whitehouse Wealth Management.

3. Determine the After-Tax Rate of Return on Investments

After determining the projected time horizons and spending requirements, the real after-tax rate of return must be computed to evaluate the feasibility of the portfolio providing the required income. A required rate of return of more than 10% (before taxes) is usually an unreasonable goal, even for long-term investing. As you get older, your return threshold decreases since low-risk retirement portfolios are mostly made up of low-yielding fixed-income assets.

If, for instance, a person has a $400,000 retirement portfolio and income needs of $50,000, assuming no taxes and portfolio balance preservation, they are relying on an excessive 12.5 percent return to get by. The significant benefit of retirement planning at a young age is that someone may develop the portfolio to provide a reasonable rate of return. Using a $1 million gross retirement investment account, the expected return is a much more realistic 5%.

Investment returns are generally taxed depending on the sort of retirement account you have. Thus, the actual rate of return must be calculated after taxes. However, knowing your tax position when you start withdrawing assets is essential for the retirement-planning process.

4. Compare Risk Tolerance to Investment Goals

Whether youre in charge of the investment decisions or a professional money manager, a reasonable portfolio allocation that balances the issues of risk aversion and returns targets is perhaps the essential stage in retirement planning. How much risk are you prepared to accept to achieve your goals? Should part of the income be put away in risk-free Treasury bonds to cover necessary expenses?

You must ensure that youre comfortable with the risks in your portfolio and understand what a necessity is and what is a luxury. That should be discussed carefully, not just with your financial counselor but also with your family members. Dont be a micro-manager who reacts to everyday market noise, advises Craig L. Israelsen, a designer at 7Twelve Portfolio. Helicopter investors tend to over-manage their investments. When several mutual funds in your portfolio have a terrible year, increase your investment in them. Its similar to parenting: the child that requires your affection the most usually deserves it the least. Portfolios are comparable. Dont give up on the mutual fund youre upset with this year; it may be the greatest performer in the next one.

Markets go through long up and down cycles, and if youre investing money you wont need to tap into for 40 years, you can afford to see your portfolio value increase and decrease with those cycles, says John R. Frye, CIO, and co-founder of Crane Asset Management, LLC. When the market falls, buy rather than sell. Refuse to succumb to the panic. Youd want to buy clothes if they were on sale for 20% off, right? Why not stocks if they were on 20% off sale?

5. Stay on Top of Estate Planning

Another critical stage in a well-rounded retirement plan is estate planning, and each part needs the knowledge of experts, like attorneys and accountants, in that specialized sector. Life insurance is also an essential component of estate planning and retirement planning. Having a comprehensive estate plan in place, as well as life insurance coverage, guarantees that your assets are dispersed in the way of your choosing and that your loved ones wont face financial difficulty after your death. A well-thought-out strategy also assists in avoiding a costly and often time-consuming probate process.

Another important aspect of estate planning is tax planning. If a person intends to leave assets to family members or a charity, the tax consequences of either gifting or transferring them through the estate process must be weighed.

A typical retirement-plan investing strategy provides returns that cover annual inflation-adjusted living costs while protecting the portfolios value. The portfolio is subsequently passed to the deceaseds beneficiaries. You should contact a tax advisor to establish the best approach for the individual.

Estate planning will change over the course of an investors lifetime. Powers of attorney and wills must be established early on. When you start a family, a trust may become an essential part of your financial plan. How you want your money distributed later in life will be critical in terms of cost and taxes, says Mark T. Hebner, founder and president of Index Fund Advisors, Inc. Collaborating with a fee-only estate planning lawyer can help you prepare and maintain this element of your overall financial plan.

The Bottom Line

Individuals are bearing a more significant burden of retirement preparation than ever before. Few employees, particularly in the private sector, can rely on an employer-provided defined-benefit pension. The transition to defined contribution plans, like 401(k)s, also implies that investment management becomes your responsibility rather than your employers.

One of the most challenging parts of developing a comprehensive retirement plan is balancing reasonable return expectations with the desired life standard. The ideal option is to create a flexible portfolio that can be adjusted regularly to reflect changing market circumstances and retirement goals.

A recent study determined that on average, Baby Boomers have an average of $152,000 in retirement accounts. Yet even though that is a nice-sized sum, the reality is that it could be far from adequate when it comes to generating a livable income in retirement particularly given that life expectancy is so much longer these days.

Further, with an average 5-year CD rate standing at less than 0.4%, investing $150,000 would only generate an annual return of $600 which is far less than most people need to live on, even combined with income from other sources like Social Security. So, what can you do to catch up if you’ve fallen behind on your retirement savings?

The good news is that you have options. Strategies for Catching Up on Retirement Savings With low savings rates in the U.S., it is no wonder that the EBRI (Employee Benefit Research Institute) 2020 Retirement Confidence Survey reported that only 27% of individuals feel very confident in having enough for a comfortable retirement.

There are several reasons for this. One has to do with the near disappearance of the traditional employer-sponsored defined benefit pension plan. These plans would typically continue to generate income for the remainder of a worker/retirees lifetime and in some cases, for the lifetime of the individuals surviving spouse, too.

Today, however, most companies offer defined contribution plans such as the 401(k) where the responsibility for generating enough income in retirement falls to the employee, not the employer.

Social Security provides another potential source of retirement income for those who qualify (either though their work record and/or that of their spouse). According to the Social Security Administration, an average wage-earner can typically replace about 40% of his or her pre-retirement earnings with Social Security retirement income benefits.

However, if you wait to file until after you have reached your full retirement age (FRA), you could increase the amount of income from Social Security by up to 32%. Thats because each year that you wait to file (between your FRA and age 70), you can earn an 8% delayed income credit. You can also initiate some strategies for reducing or eliminating taxes on both Social Security and other retirement income sources.

This, in turn, will provide you with more net spendable income in retirement. For example, in some cases, Social Security retirement benefits may be taxable. This is true if you are receiving Social Security before your full retirement age and you are also receiving income from various other sources.

For instance, you may be taxed on Social Security if: You file a federal tax return as an individual and your combined income is: Between $25,000 and $34,000 (up to 50% of your benefits may be taxable) More than $34,000 (up to 85% of your benefits may be taxable) You file a joint tax return, and you and your spouse have a combined income that is: Between $32,000 and $44,000 (up to 50% of your benefits may be taxable) More than $44,000 (up to 85% of your benefits may be taxable) You are married, and you file a separate tax return. Your combined income equals your adjusted gross income plus any non-taxable interest earned, plus one-half of your Social Security benefits. By making sure that you receive Social Security tax-free, spendable income can increase.

You could also take advantage of the Roth IRA. With these accounts, contributions go in after-tax. But the earnings as well as the withdrawals are tax-free, regardless of what the then-current income tax rates are.

While those who qualify for a Roth IRA can contribute up to $6,000 if age 49 or younger, and up to $7,000 if age 50 or older, there are ways that you could boost the amount you have in a Roth account by rolling over money from a traditional IRA and/or retirement plan.

Which Strategies for Increasing Retirement Savings and Income are Right for You?

Everyones financial picture is different. So, it is recommended that you discuss your particular needs with a retirement income planning specialist.

Since serving in the military doesnt allow for much spare time, it might be challenging to research and select the best investments. The good news is that there are several savings and investing options available to help you prepare for a comfortable future without adding a lot of time or worry to your already hectic schedule. Here are five of the most significant investments for service members to consider.

KEY TAKEAWAYS

• Service members have access to various savings and investing options, including some that are unavailable to civilians.
• The federal Thrift Savings Plan (TSP) is comparable with a 401(k) plan, and it offers automatic paycheck deductions and matching contributions.
• Both Traditional and Roth IRAs offer a diverse variety of investment options and can be an excellent complement to a TSP.
• The Savings Deposit Program, 529 college savings programs, and real estate are examples of other investments.

Federal Thrift Savings Plan (TSP)

The TSP is a qualified retirement plan that offers federal employees and military members a low-cost, tax-advantaged investment. You may create your investment portfolio, ranging from a short-term US T-bond to index funds to a life-cycle fund, which automatically rebalances your assets as you approach retirement.

For your TSP contributions, you have two options for tax treatment:

Traditional TSPWith this pre-tax plan, you receive a tax break the year you contribute and pay taxes when you take out funds in retirement.

Roth TSPThis after-tax plan doesnt provide immediate tax benefits, but eligible withdrawals are tax-free in retirement.

If youre not sure which choice is best for you, use TSP.govs contribution comparison tool.

The maximum contribution to a TSP in 2021 is $19,500, or $26,000 for those 50 or older. If youre a member of the Federal Employee Retirement System (FERS) or the Blended Retirement System (BRS), you can earn up to 5% extra from the militarys matching contributions. Youll receive a dollar-for-dollar match on the first three percent of your salary that you put to the TSP, followed by a 50 cents-on-the-dollar match on the following two percent. The more you save, the higher the match, so it pays to contribute as much as possible.

You may set up automatic installments that come directly out of your paycheck, similar to a 401(k), making it simple to set it and forget it. Itll be wise to set up automatic deposits before receiving your first check; that way, you wont lose out on any money.

Individual Retirement Accounts (IRAs)

Even if you max out your TSP contributions, you may still save money in an individual retirement account (IRA). An IRA can be an excellent way to complement your TSP and ensure a comfortable retirement.

IRAs, like the TSP, are available in traditional (pre-tax) or Roth (after-tax) forms. Due to the wide range of investment options, IRAs provide more flexibility than TSPs. The contributions limitations, on the other hand, are significantly lower. The maximum contribution to IRAs in 2021 is $6,000 ($7,000 for those 50 or older).

529 College Savings Plans

A 529 plan might be a tax-advantaged method to save if you have children and anticipate future education costs. Tax legislation approved in 2017 and 2019 allows you to use a 529 plan to pay for K-12 expenses rather than simply college and other post-secondary education. While contributions arent tax-deductible at a federal level, more than 30 states provide a full or partial tax deduction or credit. A 529 plan grows tax-free and allows for tax-free withdrawals if used for eligible education costs.

You can contribute any amount you want to a 529 plan, but anything more than $15,000 per individual (the yearly gift tax exclusion) would result in federal gift taxes. Most plans allow you to set up automatic investments, making it simple to keep on track.

Savings Deposit Program

The Department of Defense Savings Deposit Program (SDP) guarantees a 10% annual return on deposits of up to $10,000 to deployed military personnel serving in specified conflict zones. To qualify, you must be receiving Hostile Fire Pay and to have been deployed for at least 30 days in a row or at least one day per month for three months in a row. If you redeploy your house, you will continue to receive 10% interest for 90 days unless you request a withdrawal sooner.

While an additional $1,000 might be helpful, remember that SDP income is reported on a 1099-INT form the year you withdraw money, which means you may owe taxes on the earnings.

Real Estate

Real estate may be a great strategy to diversify and increase your earnings. The trade-off is that its riskier (and requires more work) than lower-risk investments. Nonetheless, real estate investments provide several benefits, like tax benefits and continuous passive income. Buying a house and converting it into a rental property is a typical strategy to invest in real estate (some service members purchase a property close to their bases to manage the rentals easier).

Another common alternative is real estate investment trusts (REITs). A real estate investment trust (REIT) is a corporation that owns, operates, or funds income-generating properties. Investors buy shares of publicly listed REITs through a taxable brokerage account or an IRA. REITs are required by law to distribute 90% of their earnings in the form of dividends each year, resulting in substantial dividend yields for investors.

Investing Help From the SEC

The Securities and Exchange Commission (SEC) urges service members to contact them if they have questions concerning investing or want to know how to verify an individuals or a firms license or registration. To do it, call the SECs toll-free investor helpline at 800-732-0330 (dial 1-202-551-6551 if youre calling from outside the U.S.) or send an email to [email protected]. The SEC is a member of the Department of Defenses Financial Readiness Network and regularly holds investor education briefings on military facilities. If youre interested, email [email protected].

The Bottom Line

Remember that there are several other options to save and invest, including U.S. Savings Bonds (Series I Savings Bonds are paying 3.54 percent throughout October 2021) and Servicemembers Group Life Insurance.

Service members can also take advantage of programs that, while not investments, can help you save money. The VA Home Loan program, for example, provides mortgages with no down payment, low interest rates, cheap closing costs, and no requirement for private mortgage insurance (PMI).

Additionally, the Post-9/11 GI Bill covers the entire cost of in-state tuition and fees at public institutions for up to 36 months and $26,042.81 a year at private colleges and foreign schools. If you come from a rural area to attend school, you can also obtain money for accommodation (if you attend more than half-time), books, supplies, and moving expenses. Long-term service members have the option of transferring their benefits to a spouse or child.

Where Can Service Members Invest Their Money?

Military families can make the same investments as civilians and a few that are only available to federal government employees and military members.

Can Military Members Invest in Stocks?

Service members can create taxable brokerage accounts to purchase and sell stocks, ETFs, and other securities.

How Long Do I Have to Serve to Be Eligible for a Military Pension?

To be eligible for the lifelong monthly annuity, you must have served for at least 20 years. Your benefit is determined by the number of years you served and the amount you earned. The precise method for calculating benefits is determined by when you first joined the service.

Life insurance coverage can help you to better ensure that your loved ones won’t have to struggle financially in case of the unexpected – especially during an already difficult time in their lives.

Unfortunately, unanticipated accidents and illnesses can – and do – occur. So, if you are faced with this type of scenario, it is good to already have a plan in place that can keep those you care about secure financially. This, in turn, can allow them to maintain their current lifestyle rather than uproot and/or cut back on the items and services they need. 

Suppose you are an employee of the Federal government. In that case, you have the Federal Employees Group Life Insurance, or FEGLI, program. This financial “safety net” could help your survivors to wipe away debt (such as a home mortgage or credit card balance(s), pay for your final expenses, and/or replace lost income. 

It is essential to know how this coverage works, though, as well as whether or not you will have enough financial protection for your loved ones. Otherwise, you, and they, could be relying on a false sense of financial security.

Who is Eligible for FEGLI Life Insurance Coverage?

Most full- and part-time federal government employees are eligible for FEGLI life insurance coverage. However, participating in the FEGLI program is completely voluntary, and if you choose to cancel your FEGLI coverage, you may do so at any time.

However, unless your position is specifically excluded from FEGLI coverage by law or regulation, though, you will be automatically enrolled in the Basic life insurance. This Basic insurance coverage will become effective on the first day that you are in a pay and duty status in an eligible position. 

As a new Federal employee, you will automatically be covered for Basic life insurance through FEGLI – unless you elect to waive your enrollment. Note, however, that if you do waive FEGLI coverage – and you later wish to re-enroll in the program, you will have to wait for one year until after you have waived the coverage. In addition, it will also be necessary for you to undergo a physical exam (at your own expense) in order to qualify. 

Coverage Options with the Federal Employees Group Life Insurance Program

The Federal Employees Group Life Insurance, or FEGLI, coverage is designed as a group term life insurance plan. That means that it provides death benefit only protection, without any cash value or investment built up inside the policy. FEGLI coverage is currently offered through this plan by Metropolitan Life Insurance Company (Met Life). 

There are two types of coverage that are offered through the FEGLI program. These include Basic and Optional. Unless you specifically waive your FEGLI basic coverage benefit, most Federal employees are automatically enrolled in the Basic coverage. 

FEGLI Basic Life Insurance Coverage

This Basic FEGLI coverage provides either a flat $10,000 of death benefit, or an amount that is equal to the rate of the employee’s annual basic pay, rounded to the next $1,000, plus an additional $2,000 – whichever dollar amount is greater.

FEGLI enrollees who are age 35 and younger are also covered by an additional Basic life insurance provision, at no added premium cost. This is referred to as the Extra Benefit, which doubles the amount of Basic life insurance benefit that is payable. 

Starting on the enrollee’s 36^th birthday, however, the amount of the Extra Benefit will decrease by 10% each year until the employee reaches age 45. At that time, the Extra Benefit coverage will disappear altogether. 

In addition to Basic FEGLI coverage, Federal employees may also choose to have additional Optional life insurance coverage. You must, however, be enrolled in the Basic life insurance in order to elect any Optional FEGLI coverage. 

Optional FEGLI Coverage

There are three different choices for the Optional FEGLI coverage. These include:

• Option A – Option A is the Standard Optional Insurance. This equals a flat $10,000 in additional, optional life insurance coverage.

• Option B – Option B is Additional Optional Insurance. This coverage comes in 1, 2, 3, 4, or 5 multiples of your annual pay, after the pay has been rounded to the next higher thousand. It is important to note that this coverage does not include the extra $2,000 that is added for Basic insurance. 

• Option C – Option C is Family Optional Insurance. This FEGLI option provides coverage for your spouse and/or your eligible dependent children. If you elect Option C, all of your eligible family members will automatically be covered. You can elect 1, 2, 3, 4 or 5 multiples of coverage. Each multiple is equal to $5,000 for a spouse, and $2,500 for each eligible child. 

The death benefit proceeds from any of these FEGLI life insurance plans are received income-tax-free by the plan’s beneficiary (or beneficiaries). Therefore, 100% of the proceeds may be used for the survivors’ current and/or future needs. 

Additional Coverage Options Through FEGLI

In addition to the Basic and Optional FEGLI coverage, there are some other life insurance protection alternatives, too, through the Federal Employees Group Life Insurance program. These include:

• Accidental Death and Dismemberment (AD&D) coverage
• Living Benefits

Accidental Death and Dismemberment coverage is an automatic component of the Basic FEGLI insurance plan (as well as FEGLI Option A). The AD&D benefits are payable if an insured individual sustains an injury, by accidental means, and within 90 days of that injury, the insured individual either dies or loses his or her eyesight and / or a limb. 

The accidental dismemberment benefit is based on the amount for which you are insured on the date that the accident actually occurs, as well as the extent of the loss of the dismemberment. 

Living benefits refer to options for using life insurance proceeds while the insured is still alive. For instance, you could be eligible for these benefits if you have been diagnosed with a terminal illness and you have a life expectancy of nine months or less. 

Federal employees are allowed to elect a full benefit, which refers to all of your Basic insurance coverage, or you could alternatively elect to receive just a partial living benefit. (These benefits are typically paid out in multiples of $1,000). It is also important to note that only the Basic FEGLI life insurance is available for payment as a living benefit.

How Much Does FEGLI Life Insurance Coverage Cost?

The cost of the Federal Employees Group Life Insurance coverage is split between you and your employer, with you paying two-thirds of the premium, and the government paying for the remaining one-third. 

The FEGLI Basic insurance premium is a level rate that is based on each $1,000 of coverage. Level premiums refer to the rate that is charged for the duration of the coverage period. Also, unlike many individual term life insurance plans, the cost of FEGLI coverage will not rise as the employee gets older. (Although overall rate increases may occur for the FEGLI group plan as a whole). 

Selecting Your FEGLI Coverage Beneficiary

Choosing your beneficiary (or beneficiaries) can be an important step, as this person or entity will receive the FEGLI insurance proceeds if you should pass away while you are covered by this plan. 

The beneficiary that you select does not have to be an individual. Rather, it may be an entity, such as a trust or a charity, and / or a business. 

You will be required to designate a beneficiary if:

• You want benefits to be paid to a person, firm, organization, or other legal entity not listed in the order of precedence
• You want benefits to be paid in a different order than the order of precedence, or
• You want your FEGLI benefits to be paid to a trust that you have established for your minor children. 

When a covered individual passes away, the Office of Federal Employees’ Group Life Insurance, or OFEGLI, will pay benefits in a particular order. This order of benefit payment is set by law, and not by the insurance plan itself. 

The order of benefit payout is as follows:

• If you assigned ownership of your life insurance, benefits will first be paid out to the beneficiary or beneficiaries that were designated by your assignee, if any. Second, if there is no such beneficiary, then the benefits will be paid to your assignee.
• If you did not assign ownership and there is a valid court order, then benefits will be paid in accordance with that court order.
• If you did not assign ownership and there is no valid court order on file, then the benefits will be paid out in this order:

• First, to the beneficiary or beneficiaries that you validly designated.
• Second, if no such beneficiary exists, then benefits are paid out to your widow or widower.
• Third, if there are none of the above, the benefits will be paid to your child or children, in equal shares, and the descendants of any deceased children.
• Fourth, if none of the above, then the payout will go to your parents in equal shares, or the entire amount to the surviving parent.
• Fifth, if none of the above are available, then benefits will go to the court-appointed executor or administrator of your estate.
• Sixth, if none of the above, then benefits will go to your other next of kin entitled under the laws of the state where you lived.

FEGLI Option C benefits are paid to you, the insured, upon the death of your spouse and / or your eligible children. 

How Much Life Insurance Coverage Do You Need?

In some cases, FEGLI life insurance coverage is not enough to protect the financial needs of your loved ones. Because of that, it is important that you discuss all of your current and potential future financial objectives with an insurance and retirement planning specialist.