The truth of the matter is that women are controlling more wealth than any other time in our history. They also face unique challenges when it comes to retirement planning. The fact that, on average, women live longer than men make proper planning even more important.
In my experience working with households where women are the sole financial decision maker, women value professional advice and collaboration when it comes to retirement planning. They are confident in their ability to stick with a plan but are not overconfident in their ability to manage risk when markets act up.
Time vs Timing- They embrace the idea that the time spent invested in the market is more valuable than timing the market. Meeting with a financial planner has more in common with working with a personal trainer than going to a doctor. There are no overnight remedies but a disciplined plan over time is proven to be the most effective strategy.
Inflation is the silent killer- The primary goal of retirement planning is not to get rich. It is to save enough for retirement and have our investments outpace inflation. Holding cash feels good in times like these but holding too much over the long run erodes the purchasing power on our savings.
Social Security Can Get Complicated- If you’ve spent an extended amount of time out of the workforce to raise a family or care for a family member, you may have a lower social security benefit than expected. This is because your Social Security benefit takes into consideration your top 35 working years. If you spent a good amount of time outside of the workforce there are going to be some zeroes averaged in when calculating your benefit. If you are divorced, you should educate yourself on any spousal and/or survivor benefits that you may be eligible for from your ex-spouse.
Confronting Long Term Care- We have all seen the statistics. Women have a longer life expectancy than men. This increases the probability of being a caretaker and also needing outside help to care for themselves. Addressing this potential cost and how it would affect your retirement plan is critical. For many, it could be the largest risk to their retirement savings.
Aligning Your Values with Your Investments- With the rise in interest for sustainable investing, there are many investment companies that can tailor a portfolio to invest in companies with a focus on environmental, social, and governance (ESG) concerns. This is great news for those that want to invest in companies that are having a positive social and environmental impact.
A Smarter Way to Be Charitable- The ability to deduct charitable contributions has become more difficult due to the SECURE Act which was legislation passed by Congress in 2019. However, there are strategies where you can bunch your contributions in a given year to increase the likelihood of being able to receive a deduction.
If you are within 10 years of retirement, now is a good time to get organized and start assembling your trusted team of professionals to help you get the most out of your retirement. If you have questions about any of the above or would like to discuss how I can help you plan, feel free to reach out for a complimentary consultation.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA / SIPC. Investment advice offered through Stratos Wealth Partners, Ltd, a registered investment advisor. Stratos Wealth Partners is a separate entity from LPL Financial.
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Only one-in-four Americans (27%) feel very confident that they will have enough money to live comfortably when they retire, according to the 2020 Retirement Confidence Survey Summary Report.1 While the number is up slightly from the 2018 survey (23%), it underscores a pervasive sense of uncertainty among those approaching retirement age.
While there is no single action that can boost the collective confidence of retirees, there are several key investment mistakes that, if avoided, can help maximize retirement savings and provide confidence to those who are entering their Golden Years.
Pitfall #1: Failing to Maximize Your Contribution
If you can afford to do so, contributing the maximum amount to your employer-sponsored retirement plan will increase the chances that you’ll reach your investment goal. The earlier you start, the better; it will allow your investments, and any potential earnings to grow on a tax-deferred basis.
Pitfall #2: Failing to Develop a Concrete Plan
Establishing clear goals that incorporate a time element (number of years until retirement) is necessary to create a relevant investment plan. Without such a plan, it is difficult to understand whether your savings will provide you with the living standard to which you’ve grown accustomed and for each year of your retirement.
Pitfall #3: Short-Term Investment Mindset
The stock market fluctuates; that’s a fact. And in the short-term they face a relatively high risk of price volatility. But in the long-term stocks have historically delivered relatively stable earnings. So selling off your holdings whenever the market takes a dip is a sure way to incur losses that impact your long-term goals.
Pitfall #4: The Quest for Perfection
Buying low and selling high is evergreen advice, but trying to time investment decisions on when the market will be at its lowest or highest is risky business, often leading to missed opportunities. As per #3 above, investing for the long-term can provide a more stable investment mindset.
Pitfall #5: Eggs All in One Basket
Some investors make the mistake of investing in just one fund or asset type, thereby subjecting it to high risk should the market impact their specific holding. Spreading your investment risk over a mix of assets can help manage potential loss during these sharp market swings. The key here is diversification to offset losses in a particular asset category.
With these pitfalls in mind, you are well-positioned to avoid the common mistakes of other investors and maximize opportunities for your retirement plan.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Past performance is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Thinking of Converting Your Traditional IRA to a Roth? Now May Be the Time
Anyone who is thinking of converting a traditional IRA to a Roth IRA may want to consider do it this year. Why? Because today’s unique conditions create an opportunity to minimize the tax bite from converting. In fact, many have already taken advantage of this opportunity, with one provider reporting a 67% increase during the first four months of 2020 compared to a year earlier.1
But before you begin to decide whether or not to convert, make sure you are familiar with what’s involved with a Roth conversion.
What’s a Roth Conversion?
When you convert your traditional IRA to a Roth IRA, any deductible contributions you had made, along with any investment earnings, are taxed as ordinary income for the year of the conversion. That means the taxable value of the conversion could push you into higher federal and state tax brackets.
You will be responsible for full payment of all taxes in the year the conversion is made. If you use assets from the traditional IRA to pay those taxes, the tax amounts could be treated as premature withdrawals, so you could be subject to additional taxes and penalties.
Depending upon your personal financial situation, a Roth IRA conversion could potentially provide a tax-adjusted benefit over time, provided you meet the eligibility requirements.
Why Now?
The coronavirus pandemic has created unique conditions that may make a Roth conversion more attractive than usual.
Your taxable income may be lower
If, like millions of Americans, you have been furloughed or laid off, or your sales commissions are down, you will likely report lower taxable income for 2020. This may put you in a lower tax bracket so that monies converted to a Roth would be taxed at a lower rate than would otherwise apply (unless the amount converted pushes you into a higher bracket). For instance, converting a $15,000 IRA when your marginal federal tax rate is 12% saves $1,500 of tax compared to converting at a 22% marginal rate — and that does not include state tax, which might also drop.2
Your business may incur a loss
The pandemic is causing many businesses to close or incur a loss. If you expect to report a business loss on your personal return, you may be able to convert to a Roth at a reduced tax cost. With the Roth conversion creating additional income, you could use the loss generated by the business to offset some or all of that income.
Your IRA balance may be down
To minimize taxes, it’s better to convert assets when they’re low in value. Although U.S. stocks have recovered most of the ground lost in February and March, it’s possible your IRA balance may still be well off its peak, depending on how it is invested.
RMDs are suspended for 2020
As part of the CARES Act, required minimum distributions (RMDs) for traditional IRAs and qualified retirement plans were suspended for this year. Not taking distributions from a traditional IRA might keep or put you in a lower tax bracket by reducing your taxable income, making it even more desirable to convert to a Roth.
Current tax rates are low and could go up
The 2017 Tax Cuts and Jobs Act (TCJA) reduced federal tax rates, cutting the top marginal rate to 37%. That’s relatively low compared with recent history. Given the staggering price tag of the pandemic bailout (so far) and the ballooning budget deficit, it’s reasonable to assume that at some point, tax rates may increase. When this might happen is anyone’s guess, but converting while rates are relatively low is something to consider.
To Convert or Not?
Whether you would be better off leaving your funds in a traditional account or moving all or some of them to a Roth IRA will depend upon your personal circumstances. Generally speaking, Roth IRA conversions are best suited for investors who have significant time until retirement, are high wage earners, think they may be in a higher tax bracket at retirement, or are looking for an estate planning tool to help pass wealth to their heirs.
Whatever your circumstances, keep in mind that IRS rules governing IRAs and conversions are complex. So be sure to consult with a financial or tax professional before deciding.
2Example is for illustration only. Your results will differ.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year your convert, you must do so before converting to a Roth IRA.
This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.
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The story is a common one these days. You have been furloughed or laid off, just a few years before you plan to retire. Or, your work-from-home arrangement is ending, and you’re not keen on resuming the commute or going back to a crowded workspace. Retiring early may be a good idea, since fate has presented the opportunity?
Many 50- and 60-somethings are asking themselves this very question. In fact, the average American retires at age 61.1 But, that’s at least five years away from collecting full Social Security retirement benefits, not to mention pensions, which typically begin at age 65, when available. What’s more, Medicare coverage does not begin until age 65, leaving early retirees with potentially hefty health insurance premiums until Medicare kicks in.
Anyone contemplating retiring early will want to plan carefully and ask several important questions.
What age is best for you will ultimately depend upon your financial situation as well as your anticipated life expectancy. For most people, holding off until normal retirement age is worth the wait. But you may want to consider taking your benefits earlier if:
You are in poor health.
No longer working and need the benefit to help make ends meet.
Earn less than your spouse and your spouse has decided to continue working to help earn a better benefit.
How Will You Fund Health Care Costs?
A big obstacle to early retirement is health insurance. If you are working for a company that pays all or most of your health insurance, you could face hundreds of dollars in added monthly expenses if you retire before age 65. Plus, most companies no longer offer retiree health benefits, and if they do, the premiums can be high or the coverage low. In addition to health insurance premiums, there are also co-pays, annual out-of-pocket deductibles, uncovered procedures, and out-of-network costs to consider — not to mention dental and vision care costs.
On the positive side, the Affordable Care Act (ACA) prohibits insurance companies from discriminating because of preexisting illnesses and limits how much they can charge based on age. And for those with lower incomes, government subsidies may be available.
What Will Early Retirement Mean for Your Investing and Withdrawal Strategies?
Perhaps the most significant concern for early retirees — one that is often overlooked — is how retiring early will impact their investing and withdrawal strategies. Retiring early means taking larger distributions from your retirement savings in the early years until Social Security and pension payments begin. This can have a significant impact on how long your savings last, perhaps more so than if larger distributions are taken later in retirement. Consider the following:
Delay withdrawals from tax-favored retirement accounts, such as individual retirement accounts (IRAs) or 401(k) plans. The longer you wait to withdraw this money, the more you can potentially benefit from tax-deferred compounding. Instead, consider tapping into taxable accounts first.
Adjust your withdrawal rate to help ensure that your savings will last throughout a lengthened retirement. Financial planners typically recommend a 4%-5% annual withdrawal rate at retirement, but you may want to lower this since you will need your savings to last longer.
Structure your investments to include a significant growth element. Since your money will have to last longer, you will want to consider including stocks or other assets that carry high growth potential. Stocks are typically more volatile than bonds or other fixed-income investments but have a better long-term record of outpacing inflation.
So, if the coronavirus pandemic has left you thinking about retiring early, make sure you are prepared. The first place to start is with a detailed plan that includes estimated income and expenses. Work with a financial professional to put in place a plan that factors in all of the necessary elements you will want to consider.
Source/Disclaimer:
1Source: Gallup, Snapshot: Average American Predicts Retirement Age of 66, May 10, 2018.
This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.
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Tips to Help Lower Your Tax Bill with Year-End Planning
As the end of the year draws near, the last thing anyone wants to think about is taxes. But if you are looking for ways to minimize your tax bill, there’s no better time for tax planning than before year-end. That’s because there are a number of tax-smart strategies you can implement now that may reduce your tax bill come April 15 or in the years ahead.
Consider how the following strategies might help to lower your taxes.
Put Losses to Work
If you have capital gains, IRS rules allow you to offset your gains with capital losses. Short-term gains (on assets held one year or less) are reduced by short-term losses, and long-term gains (on assets held longer than a year) are reduced by long-term losses. If your net long-term capital gain is more than your net short-term capital loss, the net capital gain generally is taxed at a top rate of 20%.1 A net short-term capital gain, on the other hand, is taxed at ordinary rates, which range as high as 37%. To the extent that losses exceed gains, you can deduct up to $3,000 in capital losses against ordinary income on that year’s tax return and carry forward any unused losses for future years.
Given these rules, there are several actions you should consider:
Avoid short-term capital gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term capital losses to offset them, consider holding the assets until you’ve met the long-term holding period (generally, more than one year).
Take a good look at your portfolio before year-end and estimate your gains and losses. Some investments, such as mutual funds, incur trading gains or losses that must be reported on your tax return and are difficult to predict. But most capital gains and losses will be triggered by the sale of the asset, which you usually control. Are there some winners that have enjoyed a run and are ripe for selling? Are there losers you would be better off liquidating? The important point is to cover as many of the gains with losses as you can, thereby minimizing your capital gains tax.
Consider taking capital losses before capital gains, since unused losses may be carried forward for use in future years, while gains must be taken in the year they are realized.
When determining whether or not to sell a given investment, keep in mind that a few down periods don’t mean you should sell simply to realize a loss. Stocks in particular are long-term investments, subject to ups and downs. Likewise, a healthy unrealized gain does not necessarily mean an investment is ripe for selling. Remember that past performance is no indication of future results; it is expectations
for future performance that count. Moreover, taxes should be only one consideration in any decision to sell or hold an investment.
IRAs: Contribute, Distribute, or Convert
One simple way of reducing your taxes is to contribute to a traditional IRA, if you are eligible for tax-deductible contributions. Contribution limits for the 2019 tax year — which may be made until April 15, 2020 — are $6,000 per individual and $7,000 for those aged 50 or older. Note that deductibility phases out above certain income levels, depending upon your filing status and whether you (or your spouse) are covered by an employer-sponsored retirement plan.
An important year-end consideration for older IRA holders is whether or not they have taken required minimum distributions. The IRS requires account holders aged 70½ or older to withdraw specified amounts from their traditional IRA each year. These amounts vary depending on your age. If you have not taken the required distributions in a given year, the IRS will impose a 50% tax on the shortfall. So make sure you take the required minimums for the year.
Another consideration for traditional IRA holders is whether to convert to a Roth IRA. If you expect your tax rate to increase in the future — either because of rising earnings or a change in tax laws — converting to a Roth may make sense, especially if you are still a ways from retirement. You will have to pay taxes on any pretax contributions and earnings in your traditional IRA for the year you convert, but withdrawals from a Roth IRA are tax free and penalty free as long as you’re at least 59½ and at least five years have passed since you first opened a Roth IRA. If you have a nondeductible traditional IRA (i.e., your contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS), investment earnings will be taxed but the amount of your contributions will not. The conversion will not trigger the 10% additional tax for early withdrawals.
These are just steps you can take today to help lighten your tax burden. Work with a financial professional and tax advisor to see what you can do now to reduce your tax bill.
1A 3.8% tax on net investment income may effectively increase the top rate on long-term capital gains to 23.8% for single taxpayers with a modified adjusted gross income (MAGI) of more than $200,000 and to those who are married and filing jointly with a MAGI of more than $250,000.
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The Secure Act: Easier and More Flexible Ways to Save for Retirement
Americans are woefully unprepared for retirement. As survey after survey has shown, the average person is simply not
saving enough to provide for a comfortable retirement. That’s why Congress is currently proposing reforms to retirement
plan rules.
The House bill, dubbed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019), and the
Senate bill named RESA (Retirement Enhancement Savings Act) contain a number of different provisions designed to make
plans more accessible and flexible for savers and easier for small businesses to form and administer.
Below is a summary of the legislation’s most significant changes and how they will help more Americans save more for
retirement.
Access for part-time employees. The new rules would permit most long-term, part-time workers to participate in their employer’s retirement plan if they have worked at least 500 hours per year for three consecutive years. Additionally, employers would not be required to make employer contributions for these participants.
Longer time to contribute. Although Roth individual retirement accounts (IRAs) have no contribution time limit, contributions to traditional IRAs are not permitted after you reach age 70½. The legislation would repeal this age limit so that people working past age 70½
could contribute to both types of IRAs if they wish.
Later required minimum distributions (RMDs). Currently, plan participants and traditional IRA owners are generally required to start
withdrawing a minimum amount from their retirement savings each year once they reach age 70½. The new rules would increase this
age to 72, allowing savers to enjoy tax-deferred compounding even longer.
Penalty-free withdrawals for birth or adoption of child. This change would allow plan participants to withdraw up to $5,000, penalty
free, from their plan accounts following the birth or adoption of a child. Withdrawn amounts could later be recontributed to the plan
tax free, subject to certain requirements.
Improved portability of lifetime income. For participants whose plan gives them a lifetime income investment option — typically an
annuity — the legislation gives them the ability to either keep the annuity or roll it into an IRA or other qualified plan in the event that
the annuity option is removed from the plan’s investment lineup. The annuity would not have to be liquidated and the guarantees
would be preserved, allowing greater portability.
No more “stretch” IRAs for non-spouse beneficiaries. Current rules allow most IRA beneficiaries to “stretch” RMDs from an inherited account over their own lifetimes. The proposed rules would continue this feature for spouses, but non-spouse beneficiaries
would need to take distributions within 10 years of the IRA owner’s death. There would be some exceptions to the general rule,
however, if the beneficiary is a minor, disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner.
Multiple employer plans (MEPs). The legislation would allow employers to combine forces with other unrelated employers to form
a MEP. This provision is aimed specifically at small businesses that otherwise could not offer a 401(k) to their employees due to
their high administrative costs.
A number of additional provisions target small businesses, making it easier to start and administer a retirement plan. These include
tax credits and other changes intended to reduce the amount of paperwork and costs associated with creating and maintaining a
retirement plan.
The legislation still needs to clear several hurdles in Congress before it can be signed into law. But it has bipartisan support in the
House and Senate, and the president is expected to sign it once a final bill is agreed upon. So stay tuned. A more SECURE retirement may soon be in your future.
Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
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After years of saving and investing, you can finally see the big day — retirement. But before kicking back, you still need to address a few matters. Decisions made now could make the difference between your money outlasting you or vice versa.
Calculating Your Retirement Needs
First, figure out how much income you may need. When retirement was years away, this exercise may have involved a lot of estimates. Now, you can be more accurate. Consider the following factors:
Your home base — Do you intend to remain in your current home? If so, when will your mortgage be paid? Will you sell your current home for one of lesser value, or “trade up”?
The length of your retirement — The average 65-year-old man can expect to live about 17 more years; the average 65-year-old woman, 20 more years, according to the National Center for Health Statistics. Have you accounted for a retirement of 20 or more years?
Earned income — The Bureau of Labor Statistics estimates that by 2022, 23% of people aged 65 or older will still be employed, almost twice the proportion that prevailed in 2002.1 If you continue to work, how much might you earn?
Your retirement lifestyle — Your lifestyle will help determine how much preretirement income you’ll need to support yourself. A typical guideline is 60% to 80%, but if you want to take luxury cruises or start a business, you may well need 100% or more.
Health care costs and insurance — Many retirees underestimate health care costs. Most Americans are not eligible for Medicare until age 65, but Medicare doesn’t cover everything. You can purchase Medigap supplemental health insurance to cover some of the extras, but even Medigap insurance does not pay for long-term custodial care, eyeglasses, hearing aids, dental care, private-duty nursing, or unlimited prescription drugs. For more on Medicare and health insurance, visit Medicare’s consumer website.
Inflation — Although the inflation rate can be relatively tame, it can also surge. It’s a good idea to tack on an additional 4% each year to help compensate for inflation.
Running the Numbers
The next step is to identify all of your potential income sources, including Social Security, pensions, and personal investments. Don’t overlook cash-value life insurance policies, income from trusts, real estate, and the equity in your home.
Also review your asset allocation — how you divide your portfolio among stocks, bonds, and cash. Are you tempted to convert all of your investments to low-risk securities? Such a move may place your assets at risk of losing purchasing power due to inflation. You may live in retirement for a long time, so try to keep your portfolio working for you — both now and in the future. A financial advisor can help you determine an appropriate asset allocation.
Robber Baron: Inflation
Here’s how a 4% inflation rate would erode $400,000 over a 25-year period. Because inflation slowly eats away at the purchasing power of a dollar, it’s important to factor inflation into your annual retirement expenses.
This example is hypothetical and for illustrative purposes only.
A New Phase of Financial Planning
Once you’ve assessed your needs and income sources, it’s time to look at cracking that nest egg you’ve built up. First, determine a prudent withdrawal rate. A common approach is to liquidate 5% of your principal each year of retirement; however, your income needs may differ.
Next, you’ll need to decide when to tap into tax-deferred and taxable investments. The advantage of holding on to tax-deferred investments (employer-sponsored retirement plan assets, IRAs, and annuities) is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.2 However, earnings and deductible contributions in tax-deferred accounts are subject to income tax upon withdrawal — a tax that can be as high as 39.6% at the federal level. In contrast, long-term capital gains from the sale of taxable investments are taxed at a maximum of 20%.3 The key to managing taxes is to determine the best strategy given your income needs and tax bracket.
Also, tax-deferred assets are generally subject to required minimum distributions (RMDs) — based on IRS life expectancy tables — after you reach age 70½. Failure to take the required distribution can result in a penalty equal to 50% of the required amount. Fortunately, guidelines do not apply to Roth IRAs or annuities.2 For more information on RMDs, see the IRS’s RMD resource page or call the IRS at 1-800-829-1040.
A Lifelong Strategy
A carefully crafted retirement strategy also takes into account your estate plan. A will is the most basic form of an estate plan, as it helps ensure that your assets get disbursed according to your wishes. Also, make sure that your beneficiary designations for retirement accounts and life insurance policies are up-to-date.
If estate taxes are a concern, you may want to consider strategies to help manage income while minimizing your estate tax obligation. For example, with a grantor retained annuity trust (GRAT), you move assets to an irrevocable trust and then receive an annual annuity for a specific number of years. At the end of that period, the remaining value in the GRAT passes to your beneficiary — usually your child — generally free of gift taxes. Another option might be a charitable remainder trust, which allows you and/or a designated beneficiary to receive income during life and a tax deduction at the same time. Ultimately, the assets pass free of estate taxes to a named charity.
It’s easy to become overwhelmed by all the financial decisions that you must make at retirement. The most important part of the process is to consult a qualified financial professional, a tax advisor, and an estate-planning attorney to make sure that you’re prepared for this new — and exciting — stage of your life.
How Much Can You Withdraw?
This chart can give you an idea how much you could potentially withdraw from your retirement savings each year. For example, if you begin with $400,000 in assets and expect an average annual return of 5% over a 25-year retirement, you could potentially withdraw $18,000 per year. Withdraw more than that each year and you may outlive your money. Also consider: This chart doesn’t take income taxes into account, which can range from 10% to 35%, depending on your tax bracket.
Assumes 5% average annual return, and that withdrawal rate is adjusted for annual 4% inflation rate after the first year. This example is hypothetical and for illustrative purposes only. Investment returns cannot be guaranteed.
1Source: Labor Force Projections to 2022, Monthly Labor Review, U.S. Bureau of Labor Statistics.
2Withdrawals from tax-deferred accounts prior to age 59½ are taxable and may be subject to a 10% additional tax. Neither fixed nor variable annuities are insured by the Federal Deposit Insurance Corp., and they are not deposits of — or endorsed or guaranteed by — any bank. Withdrawals from annuities may result in surrender charges.
3A 3.8% tax on unearned income may also apply.
Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
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It used to be, investors seeking steady income turned exclusively to bonds, whose regular interest payments provided a dependable income source, especially for retirees.
But times have changed. With many retirements today lasting 30 years or more, income investors need to make sure their savings keep pace with inflation and last a long time. This means investing in assets that provide current income, yet have the potential to grow in value and yield over time.
One widely used strategy is to include dividend-paying stocks in your portfolio. History provides compelling evidence of the long-term benefits of dividends and their reinvestment:
Dividends are a sign of corporate financial health. Dividend payouts are often seen as a sign of a company’s financial health and management’s confidence in future cash flow. Dividends also communicate a positive message to investors who perceive a long-term dividend as a sign of corporate maturity and strength.
Dividends are a key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period during which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.
Dividend payers offer potentially stronger returns, lower volatility. Dividends may help to mitigate portfolio losses when stock prices decline, and over long time horizons, stocks with a history of increasing their dividend each year have also produced higher returns with less risk than non-dividend-paying stocks. For instance, for the 10 years ended June 30, 2019, the S&P 500 Dividend Aristocrats — those stocks within the S&P 500 that have increased their dividends each year for the past 25 years — produced average annualized returns of 16.3% vs. 14.7% for the S&P 500 overall, with less volatility (11.7% vs. 12.7%, respectively).1
Dividends benefit from potentially favorable tax treatment. Most taxpayers are subject to a top federal tax rate of only 15% on qualified dividends, although certain high-income taxpayers may pay up to 23.8%. However, that is still lower than the current 37% top rate on ordinary income.
Dividend-paying stocks may help diversify an income-generating portfolio. Income-oriented investors may want to diversify potential sources of income within their portfolios.
Stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market.
Dividends Can Boost Total Return2
If you are considering adding dividend-paying stocks to your investment mix, keep in mind that they generally carry higher risk than bonds. Stock investing involves the potential for loss of principal. Also, dividends can be increased, decreased, and/or eliminated at any time without prior notice. That’s why it’s important to choose your dividend-paying stocks carefully, since some companies may increase dividends to attract investors if their finances aren’t watertight or their outlook is cloudy.
Your financial professional can help you determine if dividend-paying stocks are a good fit for your portfolio.
1Source: DST Systems, Inc., based on data from Standard & Poor’s. Volatility is measured by standard deviation. Standard deviation is a historical measure of the variability of returns relative to the average annual return. If a portfolio has a high standard deviation, its returns have been volatile. A low standard deviation indicates returns have been less volatile. Past performance is no guarantee of future results.
Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
Lowering Your Tax Bill with an HSA — Today and in Retirement
For years, Americans have been schooled on the benefits of saving: for retirement, for a child’s higher education, and even for a rainy day. It’s time to add another item to that list: health care. As health insurance premiums, deductibles, and co-pays rise, the need to set aside funds specifically for medical costs has become a reality for a growing number of people.
Enter the health savings account (HSA). Created in 2003, HSAs are special savings accounts that can be used to pay for out-of-pocket health care costs. Contributions are generally tax deductible and withdrawals for qualified costs are tax free. What’s more, since un-used balances can be carried over from year to year, they can be used to fund health care costs today and in retirement.
But some restrictions do apply. Here is a summary of HSAs and their different features.
Eligibility
You can open an HSA, whether through your employer or on your own, provided you:
Are currently covered by an HSA-qualified high-deductible health plan (HDHP).* For 2019, that deductible must be at least $1,350 for single coverage and $2,700 for family coverage;
Do not have other health coverage (although certain types of insurance are allowed, such as dental and vision care);
Cannot be claimed as a dependent on someone else’s tax return; and
Are not enrolled in Medicare.
Contributions
Your contributions to an HSA are tax deductible and there are no income or phase-out restrictions. Employers can make nontaxable contributions on behalf of their employees. But the annual limits listed below still apply.
For 2019, singles can contribute up to $3,500 and families can sock away $7,000.
If you’re 55 or older anytime in 2019, you can contribute an extra $1,000.
Contribution limits are adjusted annually for inflation.
Withdrawals
You can tap into your HSA tax and penalty free to pay for any “qualified medical expense” incurred on behalf of you, your spouse, or your dependents. Below is a partial list. See this IRS webpage for more detail on qualified expenses.
Qualified expenses:
Preventative care, including doctor visits and screening services
Prescriptions
Dental care
Vision care
Unqualified expenses:
Insurance premiums (limited exceptions apply)
Non-prescription drugs (except insulin)
Expenses incurred before you establish your HSA
Note that any withdrawals that aren’t for qualified medical expenses are taxable and may be subject to an additional 20% tax.
Additional Features
HSAs can be invested in a variety of different vehicles, and interest accumulates tax free. What’s more, HSA funds never ex-pire. You can carry over unused balances from year to year. And if you leave your job, your HSA goes with you.
Once you reach Medicare eligibility age (currently age 65), you can take withdrawals from your account for any reason with-out penalty, not just for medical expenses. But be warned: If not used for medical care, withdrawals are no longer federally (and in some cases, state) tax free.
Upon your death, your HSA can be passed along to your surviving spouse. Unmarried individuals can pass the account to their beneficiary or estate; however, applicable taxes will apply.
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