We’re nearing the end of 2020 – and for many of us, it will be a relief to turn the calendar page on this challenging year. However, we’ve still got some time left, which means you have time to make some year-end financial moves that may work . . .
It’s almost Thanksgiving. And although 2020 may have been a difficult year for you, as it has been for many people, you can probably still find things for which you can be thankful – such as your family. How can you show your appreciation for your . . .
If you’re a caregiver, possibly for a loved one dealing with an illness such as Alzheimer’s disease, you’re probably already facing some significant emotional and physical challenges – so you don’t need any financial ones as well. Yet, they . . .
When you retire, you’ve learned a lot about all sorts of things, helping you avoid some of the mistakes you made earlier in life. However, you may still be susceptible to financial missteps specifically related to your retirement years. How can you . . .
When you retire, can you afford to help your loved ones?
This issue is certainly on the minds of many retirees. Consider this: Seven in 10 retirees say they are willing to offer financial support to their families, even if it could jeopardize their . . .
Those who have lived a long time have done a lot, seen a lot – and can teach us a lot. And that’s certainly true when it comes to investing.
Consider some of the lessons you might learn from experienced investors:
Regulate your emotions. . . .
The COVID-19 pandemic has unsettled the country’s employment picture for months and will likely continue to do so for a while. However, the nature and terminology of this disruption varies greatly among individuals – some have seen their jobs disappear, . . .
If you were to inherit a large sum of money, what would you do with it?
The question may not be hypothetical, especially if you are in the millennial, Gen X or Gen Z demographic groups. That’s because the baby boomers – often referred to as the . . .
Throughout much of your working life, you contribute to your 401(k), IRA and other investment accounts to help ensure a comfortable retirement. However, once you do retire, you’ll need to shift your focus somewhat from building these investments . . .
Over the past few months, just about everyone has felt the loss of some type of freedom, whether it’s being able to travel, engage in social gatherings or participate in other activities we previously took for granted. Still, as we prepare to observe . . .
During the coronavirus pandemic, our health concerns – for ourselves and our loved ones – have been at the top of our minds. But financial worries have been there, too, both for people whose employment has been affected and for investors anxious . . .
Furthermore, the benefits could help you avoid liquidating some long-term investments you’ve earmarked for retirement just to meet your daily cash flow needs.
Direct payments – You may already have received, or soon will receive, a one-time direct payment from the government. Individuals will receive up to $1,200; this amount is reduced for incomes over $75,000 and eliminated altogether at $99,000. Joint filers will receive up to $2,400, which will be reduced for incomes over $150,000 and eliminated at $198,000 for joint filers with no children. Plus, taxpayers with children will receive an extra $500 for each dependent child under the age of 17. If you don’t need this money for an immediate need, you might consider putting it into a low-risk, liquid account as part of an emergency fund.
No penalty on early withdrawals – Typically, you’d have to pay a 10% penalty on early withdrawals from IRAs, 401(k)s and similar retirement accounts. Under the Legislation, this penalty will be waived for individuals who qualify for COVID-19 relief and/or in plans that allow COVID-19 distributions. Withdrawals from traditional retirement accounts will still be taxable, but the taxes can be spread out over three years. Still, you might want to avoid taking early withdrawals, as you’ll want to keep your retirement accounts intact as long as possible.
Suspension of required withdrawals – Once you turn 72, you’ll be required to take withdrawals from your traditional IRA and 401(k). The Legislation waives these required minimum distributions for 2020. If you’re in this age group, but you don’t need the money, you can let your retirement accounts continue growing on a tax-deferred basis.
Increase of retirement plan loan limit – Retirement plan investors who qualify for COVID-19 relief can now borrow up to the lesser of $100,000 or the vested balance from their accounts, up from $50,000 or 50% of the vested balance, provided their plan allows loans. We recommend that you explore other options, such as the direct payments, to bridge the gap on current expenses and if you choose to take a plan loan work with your financial adviser to develop strategies to pay back these funds over time to reduce any long-term impact to your retirement goals.
Small-business loans – Included in the Legislation is the Paycheck Protection Program (PPP), which initially provided $349 billion in federally guaranteed loans to help small businesses – those with 500 or fewer employees – retain workers and avoid closing up shop. The first allocation of funds was quickly depleted; however, Congress authorized an additional $310 billion for the PPP. These loans may be forgiven if borrowers use the loans for payroll and other essential business expenses (such as mortgage interest, rent and utilities) and maintain their payroll during the crisis. We’ll be in a challenging economic environment for some time, but the Legislation should give us a positive jolt – and brighten our outlook.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones. Member SIPC.
However, the economic impact may vary among different age groups – and if you’re retired or about to retire, you might have some special concerns about starting to draw income from your investments when the financial markets are down. What moves should you consider making?
Here are a few suggestions:
Review your strategy (and avoid making major changes). During a market downturn, you might be tempted to “do something” – and for many people, that “something” is selling stocks to cut their losses. But this is more of an emotional response than a logical one, because your stocks are long-term investments, and by selling them when they’re down, you’re basically locking in your losses. Instead, try to address your current income needs by the cash, cash equivalents and short-term fixed-income investments in your portfolio, along with other sources, such as Social Security, dividends and interest, and even your pension, if you have one.
Review your withdrawal rate. When you retire, you need to determine how much you can withdraw each year from your retirement accounts, such as your IRA and 401(k), without running the risk of outliving your money. Before the market downturn, you might have established an appropriate withdrawal rate for your needs. Suppose, for example, this rate was 4%.
However, given the recent fluctuations in the markets, your portfolio’s value may have declined, meaning your withdrawals may be higher as a percentage of your portfolio. Therefore, you might consider adjusting your withdrawal rate downward, or, as an alternative, look for ways to cut down on your spending in the short term. With the stay-at-home measures being undertaken across the country, you may already have cut down spending in areas such as traveling, entertainment and dining out, so you may only have to make a few adjustments.
Review your reliance rate. Your reliance rate is how much you rely on your investment portfolio for your income needs. For example, if you need $60,000 in income each year and you’re getting $40,000 of that from your portfolio, your reliance rate is 66%. The higher your reliance rate, the more sensitive you may be to fluctuations in investment prices. If your risk tolerance has been greatly tested by the recent downturn and you don’t have much flexibility with your expenses, you might look for ways of lowering your reliance rate, such as certain annuities, which can provide a guaranteed lifetime income regardless of what’s happing in the financial markets.
You may want to consult with a financial professional to discuss the above suggestions and determine what other moves you might need to make. As a retiree, or near-retiree, it can be unsettling to start tapping into your resources when the financial markets are so turbulent. But if you’ve prepared or you’re willing to explore new courses of action, you can move into your golden years without getting unduly tarnished.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones. Member SIPC.
These are challenging times. Like everyone, you are concerned about keeping your family safe and healthy, and you’re doing your part to help protect your community from the effects of the coronavirus. And if you’re an investor, you must also address . . .
Here’s the story: Congress recently approved legislation called the SECURE Act, which, among its many provisions, includes several that should be of particular interest to IRA and 401(k) investors.
The first of these changes deals with the money you take out of your IRA and 401(k). As you may know, under the old rules, you were required to start taking withdrawals – known as required minimum distributions (RMDs) – from your traditional IRA and your 401(k) when you turned 70 ½. Of course, you did not have to wait until that age, but if you didn’t take your full RMDs on time, the shortfall would typically be subject to a 50% tax penalty. Under the Secure Act, the RMD age has been pushed back to 72.
This higher age could benefit you by giving your IRA and/or 401(k) more time to potentially grow on a tax-deferred basis. On the other hand, by waiting until you’re 72, you could be forced to take larger RMDs, which are calculated by dividing your account balance by your life expectancy, as determined by IRS tables. And these RMDs are generally taxed at your personal tax rate.
The second big IRA-related change concerns the age limit for making traditional IRA contributions. Previously, you could only contribute to your traditional IRA until you were 70 ½. Under the Secure Act, however, you can fund your traditional IRA for as long as you have earned income. So, if you plan to work past what might be considered the typical retirement age, you have the opportunity to add a few more dollars to your IRA.
Another SECURE Act provision deals with early withdrawals from your IRA and 401(k). Usually, you must pay a 10% tax penalty when you withdraw funds from either of these accounts before you reach 59 ½. But now, with the new rules, you can withdraw up to $5,000 penalty-free from your IRA or 401(k) if you take the money within one year of a child being born or an adoption becoming final.
The new rules also might affect your loved ones who stand to inherit your IRA. Under the old rules, a non-spouse beneficiary could stretch taxable RMDs from a retirement account over his or her lifetime. Now, most non-spouse beneficiaries will have to deplete the entire account balance by the end of the tenth year after the account owner passes away. So, this change could have tax implications for family members who inherit your IRA. You may want to consult with your estate planning or tax professional regarding this issue.
Keep the new rules in mind when creating your retirement strategies. The more you know, the better prepared you can be to make the appropriate moves for you.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones. Member SIPC.
To answer this question, you may want to evaluate two variables: your likelihood of needing long-term care and the cost of such care. Consider the following:
– Someone turning age 65 today has an almost 70% chance of eventually needing some type of long-term care, according to the U.S. Department of Health and Human Services.
– The average cost for a private room in a nursing home is about $100,000 per year, while a home health aide costs about $50,000 per year, according to Genworth, an insurance company.
Clearly, these numbers are worth thinking about. If you needed several years of long-term care, the expense could seriously erode your savings and investments. And keep in mind that Medicare typically pays only a small percentage of long-term care costs. Therefore, you may want to evaluate the following options for meeting these expenses:
Self-insure – You could “self-insure” against long-term care expenses by designating some of your investment portfolio for this purpose. However, as the above numbers suggest, you’d likely have to put away a lot of money before you felt you were truly protected. This could be especially difficult, given the need to save and invest for the other expenses associated with retirement.
Long-term care insurance – When you purchase long-term care insurance, you are essentially transferring the risk of paying for long-term care from yourself to an insurance company. Some policies pay long-term care costs for a set number of years, while others cover you for life. You can also choose optional features, such as benefits that increase with inflation. And most long-term care policies have a waiting period between 0 and 90 days, or longer, before benefits kick in. You’ll want to shop around for a policy that offers the combination of features you think best meet your needs.
Also, you’ll want an insurer that has demonstrated strength and stability, as measured by independent rating agencies. Here’s one final point to keep in mind: Long-term care premiums get more expensive as you get older, so if you’re interested in this type of coverage, don’t wait too long to compare policies.
Hybrid policy – A “hybrid” policy, such as life insurance with a long-term care/chronic illness rider, combines long-term care benefits with those offered by a traditional life insurance policy. So, if you were to buy a hybrid policy and you never needed long-term care, your policy would pay a death benefit to the beneficiary you’ve named. Conversely, if you ever do need long-term care, your policy will pay benefits toward those expenses. And the amount of money available for long-term care can exceed the death benefit significantly. Hybrid policies can vary greatly in several ways, so, again, you’ll need to do some research before choosing appropriate coverage.
Ultimately, you may decide you’re willing to take the chance of never needing any type of long-term care. But if you think that’s a risk you’d rather not take, then explore all your coverage options carefully. There’s no one right answer for everyone – but there’s almost certainly one for you.
Selling investments and moving to cash when stocks are predicted to drop – If you follow the financial news on cable TV or the internet, you’re eventually bound to discover some “experts” who are predicting imminent, huge drops in the stock market. And on rare occasions, they may be right – but often they’re not. And if you were to sell some of your stocks or stock-based investments based on a prediction and move the money to cash or a cash equivalent, you could miss out on possible future growth opportunities if the predictor was wrong. And the investments you sold still could have played a valuable part in your portfolio balance.
Selling underperforming assets in favor of strong performers – As an investor, it can be tempting to unload an investment for one of those “hot” ones you read about that may have topped one list or another. Yet there’s no guarantee that investment will stay on top the next year, or even perform particularly well. Conversely, your own underperformers of today could be next year’s leaders.
Waiting for today’s risk or uncertainty to disappear before investing – Investing always involves risk and uncertainty. Instead of waiting for the perfect time to invest, you’re better off building a portfolio based on your goals, risk tolerance and time horizon.
All these mistakes are examples of a risky investment strategy: trying to “time” the market. If you try to be a market timer, not only will you end up questioning your buy/sell decisions, but you also might lose sight of why you bought certain investments in the first place. Specifically, you might own stocks or mutual funds because they are appropriate for your portfolio and your risk tolerance, and they can help you make progress toward your long-term financial goals. And these attributes don’t automatically disappear when the value of these stocks or funds has dropped, so you could end up selling investments that could still be doing you some good many years into the future.
While trying to time the market is a difficult investment strategy even for the professionals, it doesn’t mean you can never take advantage of falling prices. In fact, you can use periodic dips in the market to buy quality assets at more attractive prices. Suppose, for example, that you invested the same amount of money every month into the same investments. One month, your money could buy more shares when the price of the investment is down – meaning you’re automatically a savvy enough investor to take advantage of price drops. While your money will buy fewer shares when the price of the investment is up, your overall investment holdings will benefit from the increase in price.
Buying low and selling high sounds like a thrilling way to invest. But in the long run, you’re better off by following a consistent investment strategy and taking a long-term perspective. It’s time in the market, rather than timing the market, that helps keep portfolio returns moving in the right direction over time.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
For starters, be aware that your 401(k) may come with what might be called “standard” features, which you should review to determine their applicability to your situation. These features include the following:
Default deferral rate – When you take a job, your employer may automatically enroll you in the company’s 401(k) plan and assign a “default” contribution rate – the percentage of your salary you will put in to your 401(k). Many companies choose a default rate of 3 percent, although, in recent years, there has been a move toward higher rates, even up to 6 percent. Unfortunately, too many people don’t question their default rate, which could be a problem, especially if it’s at the lower end. If you want your 401(k) to ultimately provide you with as many financial resources as possible, you will likely need to contribute as much as you can afford. So, be aware of your default rate, and, if you can possibly afford it, increase that level. And every time your salary goes up, consider boosting your contributions.
Investment mix – When you’re automatically enrolled in your 401(k), the amount you might initially contribute isn’t the only “off the shelf” feature – you also might be assigned a default investment option. One common default investment is known as a target-date fund, which generally includes a mix of stocks, bonds and cash instruments. Your 401(k) plan provider, or your human resources area, will typically base this mix on your age and projected retirement date. Usually, this fund will grow more conservative over time, reflecting the need to reduce the portfolio’s risk as you get nearer to retirement. However, you may not be obligated to stick with the default option. Most 401(k) plans usually offer several options from which to choose. Ideally, you’d want to spread your investment dollars among a mix of these investments to give yourself the greatest growth potential, given your risk tolerance and time horizon. And always keep in mind that your 401(k) is a long-term vehicle, designed to help you prepare for a retirement that may be decades away. Consequently, try to discipline yourself to look past the inevitable short-term drops in your portfolio.
Matching contributions – If your employer offers a 401(k) matching contribution, you should certainly take advantage of it. Consider this: If you employer matches 50 cents for every dollar you contribute, up to 6 percent of your pay, and you contribute the full 6 percent, you would, in effect, be receiving a 3 percent pay raise (50 percent of 6 percent). That’s like a 50 percent rate of return even before you invest this added money.
Taking control of your 401(k) in the ways described above can help go a long way toward getting the most from your plan – and, as a result, may help get you closer to supporting the retirement lifestyle you’ve envisioned.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Have you thought about your New Year’s resolutions for 2020? When many of us make these promises, we focus on ways we can improve some form of our health. We vow to get more physically healthy by going to the gym, or we promise to improve our mental . . .
Here are a few suggestions:
– Pay off some debts. Virtually all of us carry some type of debt, and that’s not necessarily a bad thing. For example, your mortgage not only gives you a place to live and a chance to build equity in your home, but the interest payments are typically tax deductible. Other debts, though, such as those on consumer items, are not so positive – you generally can’t deduct the interest payments, and the items themselves probably won’t enhance your personal wealth. Plus, the bigger your monthly debt payments, the less you’ll have to invest for your future. So, you might want to use your bonus or monetary gift to pay off, or at least pay down, some of your less productive debts.
– Start an emergency fund. If you were to face a large, unexpected expense, such as the need for a new furnace or a major car repair, how would you pay for it? If you didn’t have the cash on hand, you might be forced to dip in to your long-term investments, such as your stocks and mutual funds. A much better option is to build an emergency fund, containing six to 12 months’ worth of living expenses, with the money kept in a liquid, low-risk account. It will take time to build such a fund, of course, but your year-end bonus or gift money could give you a good start.
– Contribute to your IRA. You can put in up to $6,000 to your IRA, or $7,000 if you’re 50 or older. And although you’ve got until April 15, 2020, to fully fund your IRA for the 2019 tax year, you still might want to put your “extra” money into your account right away. If you wait, you’ll probably find other uses for this money. And if you’re going to enjoy a comfortable retirement, you’ll need to maximize every possible resource – and your IRA is one of your best ones. Furthermore, the sooner you get the money into your IRA, the more potential it will have to grow over time.
– Feed your college fund. If you’re already contributing to a college fund for your young children or grandchildren, you can use your year-end bonus or monetary gift to add to the fund. If you haven’t already started such an account, you might want to use this money for that purpose. You could open a 529 plan, which provides possible tax benefits and gives you control of the funds until it’s time for them to be used for college or some type of vocational school. (Depending on where you live, you might also get tax benefits from your state if you use a 529 savings plan to pay for K-12 expenses.)
To achieve all your financial goals, you’ll need to take advantage of your opportunities – and your year-end bonus or monetary gift can certainly be one of them.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
And yet, many people do just that. During market downturns, investors often move money from their 401(k)’s stock accounts into perceived safer accounts, such as those primarily containing bonds or other fixed-income securities. This move may result in reduced volatility on your 401(k) statements, and if that’s all you want, you might be satisfied. But you do need to realize the cost involved – specifically, fixed-income investments will not provide the same rate of return that equities (stocks) can. So, if you liquidate some of your equity holdings, you may slow the growth potential of your 401(k), which, in turn, could slow your progress toward your long-term financial goals. Furthermore, if you get rid of substantial amounts of your equities when their price is down, you won’t be able to benefit from owning them when their value goes up again – in other words, you’ll be on the sidelines during the next market rally.
Here’s the key issue: A 401(k) or similar employer-sponsored retirement plan is a long-term investment account, whereas moves made in reaction to market drops are designed to produce short-term results. In other words, these types of actions are essentially incompatible with the ultimate objective of your 401(k).
Of course, when the market is volatile, you may want to do something with your 401(k), but, in most cases, you’re far better off by sticking with the investment mix that’s appropriate for your goals, risk tolerance and time horizon. However, this doesn’t mean you should never adjust your 401(k)’s portfolio. In fact, you may well want to make some changes under these circumstances:
You’re nearing retirement – If you are nearing retirement, you may need to prepare your 401(k) for future downturns – after all, you don’t want to have to start taking withdrawals when your portfolio is down. So, if you are within, say, five years of retirement, you may need to shift some, but certainly not all, of your assets from growth-oriented vehicles to income-producing ones.
Your goals have changed – Even when you’re many years away from retirement, you probably have an idea of what that lifestyle will look like. Perhaps you plan to travel for several months of the year or purchase a vacation home in a different climate. These are expensive goals and may require you to invest somewhat aggressively in your 401(k). But you could change your mind. If you were to scale back your plans – perhaps more volunteering, less traveling – you might be able to afford to “step off the gas” a little and invest somewhat more conservatively in your 401(k), though you will always need a reasonable percentage of growth-oriented investments.
By responding to factors such as these, rather than short-term market declines, you can get the most from your 401(k), allowing it to become a valuable part of your retirement income.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
If you spend a lot of time on the internet, you’re not just shopping or being entertained, or following the news or participating in an online community. You’re probably also dealing with accounts and information that eventually can become part . . .
Of course, you wouldn’t really forget about your 401(k). (It does happen, however – over the period from 2004 through 2013, more than 25 million people left at least one 401(k) or similar plan behind when they left their job, according to the U.S. Government Accountability Office.) But you will have to do something with your account.
Essentially, you have four choices:
You can cash out your 401(k). It’s your money, but if you take it out before you reach 59 ½, you will owe federal income taxes, plus any applicable state and local taxes.
Also, you will likely be charged a 10% penalty for early withdrawal. Perhaps even more important, if you liquidate your 401(k) when you change jobs, you’ll be reducing the amount you’ll have left for retirement.
You can leave your 401(k) with your old employer. If your former employer permits it, you can leave your 401(k) intact, even after you move to a different job. This might be appealing to you if you like the investment choices in your account, but you won’t be able to make any new contributions. Plus, you won’t face any immediate tax consequences.
You can move the money to your new employer’s 401(k). You can consolidate your old 401(k) with one offered by your new employer, if allowed. You won’t take a tax hit, and you might like your new plan’s investment options. And you may find it easier to manage your funds if they’re all held in one place.
You can roll your 401(k) into an IRA. You don’t need the permission from any employer – old or new – to move your old 401(k) to an IRA. Your money will continue to grow on a tax-deferred basis, and an IRA offers you a virtually unlimited array of investment options – stocks, bonds, mutual funds and so on. You can make either a direct or indirect rollover. With a direct rollover, the administrator of your old 401(k) sends your money directly to the financial provider that holds your rollover IRA. No tax is withheld because you never actually take possession of the money. With an indirect rollover, you’re technically withdrawing the money and moving it to the IRA provider yourself. (You’ve got 60 days to make this transfer.) You will face a withholding of 20% of your account’s assets, but you may be able to recover most of this amount when you file your tax return. Still, for the sake of ease of movement and avoidance of all tax issues, a direct rollover may be more advantageous.
Which of these options is right for you? There’s no one “right” answer for everyone. You’ll have to consider several factors, and you’ll certainly want to consult your tax professional before making any decision. But in any case, do whatever you can to preserve – and hopefully grow – your 401(k) assets. You’ll need these resources to help fund the retirement lifestyle you want and deserve.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
What’s going on with the financial markets? Specifically, what’s behind the price swings of the past several weeks? And, more important, how should you, as an individual investor, respond?
To begin with, the recent volatility was not really all . . .