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A Retirement Fact Sheet

Brent E Chavez

A Retirement Fact Sheet

Some specifics about the “second act.”

Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you. 

1. Up to 85% of a retiree’s Social Security income can be taxed. Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states currently levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (West Virginia, incidentally, is phasing out such taxation.)1

2. Retirees get a slightly larger standard deduction on their federal taxes. Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for a single filer in this age bracket is $14,050, compared to $12,400 for those 64 or younger.2

3. Retirees can still use IRAs to save for retirement. There is no age limit for contributing to a Roth or Traditional IRA, as long as the owner earns income. So, a retiree can keep directing money into a Roth or Traditional IRA for life, provided they are not earning too much. 3

4. A significant percentage of retirees are carrying big debts. Looking at data from the Federal Reserve’s triennial Surveys of Consumer Finances, the median debt of senior households (age 65+) has more than doubled since the start of the century.4

The most stressful debt for seniors, according to a 2019 study from Ohio State University researchers, is credit card debt. The study calculates that each new dollar of credit card debt taken on by a senior household creates financial stress approximating an additional $14-20 of home loan debt.4

Moreover, a sudden financial liability may delay retirement. Another 2019 study, co-authored by researchers from the Urban Institute and the Congressional Budget Office, looks at the potential impact of a new $10,000 debt on an individual between 55-70 years old carrying the median amount of credit card debt for their age. The researchers concluded that this jump in debt would make a baby boomer 9% more likely to put off retiring.4

5. Fewer seniors live alone than you may think. The Administration for Community Living (a federal agency) says around 14% of older adults (65+) live by themselves. With millennials living at home and blended and extended families becoming common, perhaps this is not so surprising. The ACL does note that nearly half of women older than age 75 are on their own.5

6. Just 15% of women say they have a retirement strategy set down in writing. This factoid comes from the 2019 Transamerica Retirement Survey of American Workers. Another 42% say they have unwritten strategies. The remaining 43%? No strategy at all.6

7. Few older Americans budget for travel expenses. While retirees certainly love to travel, a Merrill Lynch study says that only about a third of people aged 50 and older earmark funds for their trips.7

What financial facts should you consider as you retire? What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. If you have not met with a financial professional about your retirement savings and income needs, you may wish to do so. When it comes to retirement, the more information you have, the better. 

Are you ready to get your retirement plan in place? Schedule a consultation with us today to get started:

Schedule A Consultation

Citations
1 – aarp.org/retirement/social-security/questions-answers/how-is-ss-taxed.html [4/9/19]
2 – efile.com/tax-deduction/federal-standard-deduction/ [12/4/19]
3 – investopedia.com/articles/retirement/09/over-70-retirement-plans.asp [11/13/19]
4 – nextavenue.org/retirement-older-americans-debt/ [8/9/19]
5 – forbes.com/sites/howardgleckman/2018/05/04/a-new-snapshot-of-older-adults-in-the-us/ [5/4/18]
6 – transamericacenter.org/docs/default-source/women-and-retirement/tcrs2019_op_women_and_retirement_fact_sheet.pdf [11/19]
7 – kiplinger.com/article/retirement/T037-C032-S014-5-surprising-facts-to-know-about-retirement.html [11/11/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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The Major Retirement Planning Mistakes

Brent E Chavez

The Major Retirement Planning Mistakes

Why are they made again and again?

retirement mistakes, warning sign

Much is out there about the classic financial mistakes that plague start-ups, family businesses, corporations, and charities. Aside from these blunders, some classic financial missteps plague retirees.   

Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.        

1. Leaving work too early. As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security’s Full Retirement Age (FRA) can mean comparatively smaller monthly payments. Meanwhile, if you can delay claiming Social Security, that positions you for more significant monthly benefits.1     

2. Underestimating medical bills. In its latest estimate of retiree health care costs, the Center for Retirement Research at Boston College says that the average retiree will need at least $4,300 per year to pay for future health care costs. Medicare will not pay for everything. That $4,300 represents out-of-pocket costs, which includes dental, vision, and long-term care.2     

3. Taking the potential for longevity too lightly. Actuaries at the Social Security Administration project that around a third of today’s 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.3

4. Withdrawing too much each year. You may have heard of the “4% rule,” a guideline stating that you should take out only about 4% of your retirement savings annually. Many cautious retirees try to abide by it.

So, why do others withdraw 7% or 8% a year? In the first phase of retirement, people tend to live it up; more free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.         

tax efficiency, budgeting, planning

5. Ignoring tax efficiency & fees. It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to its “preferred domain.” What does that mean? It means the taxable or tax-advantaged account that may be most appropriate for it as you pursue a better after-tax return for the whole portfolio.

Many younger investors chase the return. Some retirees, however, find a shortfall when they try to live on portfolio income. In response, they move money into stocks offering significant dividends or high-yield bonds – something you might regret in the long run. Taking retirement income off both the principal and interest of a portfolio may give you a way to reduce ordinary income and income taxes.   

6. Avoiding market risk. Equity investment does invite risk, but the reward may be worth it. In contrast, many fixed-rate investments offer comparatively small yields these days.    

7. Retiring with heavier debts. It is hard to preserve (or accumulate) wealth when you are handing portions of it to creditors.   

8. Putting college costs before retirement costs. There is no “financial aid” program for retirement. There are no “retirement loans.” Your children have their whole financial lives ahead of them. Try to refrain from touching your home equity or your IRA to pay for their education expenses.   

maze, retirement plan

9. Retiring with no plan or investment strategy. An unplanned retirement may bring terrible financial surprises; the absence of a strategy can leave people prone to market timing and day trading.

These are some of the classic retirement planning mistakes. Why not plan to avoid them? Take a little time to review and refine your retirement strategy in the company of the financial professional you know and trust.

Do you have your retirement plan in place? Set up your FREE initial consultation with Brent E Chavez today:

Schedule A Consultation

Learn more about Brent E Chavez, the Services We Provide, and Our Philosophy. Do you have any questions? Give us a shout: Contact Us, info@aeinvestmentsgroup.com, (215) 766-7002.

Citations
1 – forbes.com/sites/bobcarlson/2019/01/25/5-ways-to-maximize-social-security-benefits [1/25/19]
2 – fool.com/retirement/2019/12/11/4-steps-to-making-sure-youre-ready-to-retire.aspx [12/11/2019]
3 – ssa.gov/planners/lifeexpectancy.html [12/11/2019]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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February Newsletter

Brent E Chavez

MONTHLY NEWS AND INFORMATION FOR CURRENT AND FUTURE RETIREES

PRESENTED BY BRENT E. CHAVEZ – FEBRUARY 2020

QUOTE OF THE MONTH

“Rest is the sweet sauce of labor.”
– PLUTARCH

WHAT MATTERS MORE IN RETIREMENT: INCOME, OR SAVINGS?

Retirement saving is not just about accumulating assets. It is also about laying the groundwork for retirement spending. Any retirement strategy has a core goal: the goal of helping an individual or couple pursue their retirement dreams once their careers have concluded. So, from that perspective, the amount that needs to be saved directly relates to the amount a retiree household may need to spend. To live your best retirement, your degree of retirement savings needs to be great enough to try and correspond to that vision.

Often, articles state that pre-retirees will need to live on 70% to 80% of their final working incomes. This is a general guideline, yet it may or may not prove true for a particular household. Some people retire and find they are spending less than they once did. Others spend as much as they did while working, maybe even a bit more, due to traveling, hobbies, and social engagements. What does this imply for retirement saving? While you arguably cannot save too much for the future, you can save too little.1

Travel Tip

Clear cookies, and you might score a cheaper flight

Airlines use dynamic pricing to adjust airfares relative to demand, and they can actually do this per consumer. Most airline websites screen your search history, including the browser cookies you may have picked up while visiting other airline or travel websites. Based on these cookies, they may present you with more expensive flights than they would otherwise. Deleting cookies from your browser just before a fare search may help you avoid this dynamic pricing.
Source: MSN2

HOW THE SECURE ACT IMPACTS RETIREMENT ACCOUNTS

A new federal law, the Setting Up Every Community for Retirement Enhancement (SECURE) Act, directly affects retirees and retirement savers. It changes the rules regarding “stretching” an Individual Retirement Account (IRA) as well as longstanding retirement account rules keyed to age 70½.

Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking required minimum distributions (RMDs) from traditional Individual Retirement Accounts (IRAs) and most other employer-sponsored retirement plans. (This new RMD rule applies only to those who will turn 70½ in 2020 or later.) The SECURE ACT also lets seniors contribute to traditional retirement accounts after age 70½, as long as they have earned income; previously, this was forbidden. Both these changes have big implications for savers; large account balances can potentially grow and compound a little more before being drawn down, and amounts contributed after age 70½ could have a chance to compound as well. Turning to the workplace, the SECURE ACT allows employer-sponsored retirement plans the option to include insurance products, offering the potential for lifelong income. It also opens a door for small businesses to join multi-employer group retirement plans (MEPs). 

The new law does curtail the Stretch IRA estate strategy. Anyone who inherits an IRA of any kind in 2020 or later must withdraw the whole IRA balance within 10 years of the IRA owner’s death and pay linked taxes, unless that heir is a minor child or a surviving spouse. (Existing inherited IRAs are exempt from the new rules.) The SECURE Act is certainly worth a conversation.3,4

Learn more: The SECURE Act

Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

Under the SECURE Act, your required minimum distribution (RMD) must be distributed by the end of the 10th calendar year following the year of the Individual Retirement Account (IRA) owner’s death. Penalties may occur for missed RMDs. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements.

DID YOU KNOW?

The Romans may have built the earliest retirement villages

In the first century B.C., Julius Caesar, Sulla, and other Roman generals founded special colonae (colonies) to serve as retirement communities for Roman army veterans. Pompeii actually began as one of these communities.5

ARE BABY BOOMERS FLOCKING TO BIG CITIES?

A quick look at some federal government statistics provides a quick answer: no. Perhaps it seems like big cities are filled with baby boomers because of the simple fact that this demographic group is larger than others. Research does not back up this assumption, however. As a recent New York Times analysis of Census Bureau data noted, 17.2% of Americans aged 54-72 lived in urban areas in 2018; back in 1990, 21.6% did. This percentage declined gradually, but steadily, over these 28 years, and looking more closely at the decline, the 54- to 72-year-olds of 2018 were 11% less likely to live in urban neighborhoods than the 54- to 72-year-olds of 2000.

As other Census Bureau data from 1990-2018 reveals, the Americans most likely to live in urban settings have been those aged 25 to 29. The least likely? Those aged 70 to 74. The odds of urban living start to increase again after age 80. Even so, just two years ago, only 19.8% of Americans aged 85 or older lived in urban settings.6

ON THE BRIGHT SIDE

A fair number of employers are offering phased retirements. According to the Transamerica Center for Retirement Studies, 30% of U.S. companies permit their workers to move from full-time hours to part-time hours as part of a retirement transition, and 21% allow employees to move into less-stressful roles prior to retiring.7

BRAIN TEASER

What goes up and down each day, yet does not physically move?

STUMPED? CALL 215-766-7002 FOR THE ANSWER!

CITATIONS
1 – forbes.com/sites/kristinmckenna/2019/07/10/debunked-6-myths-about-retirement [7/10/19]
2 – msn.com/en-us/travel/tips/travel-tip-clear-your-browser-before-booking-a-flight-to-get-a-better-deal/ar-AAISUPG [10/17/19]
3 – inquirer.com/news/secure-act-retirement-2020-annuities-rmd-529-plan-taxes-20191223.html [12/23/19]
4 – investmentnews.com/the-stretch-ira-is-dead-175775 [12/27/19]
5 – livius.org/articles/concept/colonia/ [6/8/19]
6 – nytimes.com/2020/01/24/upshot/myth-urban-boomer.html [1/24/20]
7 – cnbc.com/2019/10/04/earning-income-after-65-how-to-make-it-work-for-you.html [10/4/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

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2019 IRA Deadlines Are Approaching

Brent E Chavez

2019 IRA Deadlines Are Approaching

Here is what you need to know.

Financially, many of us associate April with taxes – but we should also associate April with important IRA deadlines.

April 1, 2020 is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.

A new federal law must be noted here. The Setting Every Community Up for Retirement Enhancement (SECURE) ACT, passed late in 2019, changed the age for the initial RMD for traditional IRAs and traditional workplace retirement plans. It lifted this age from 70½ to 72, effective as of 2020.1

So, if you were not 70½ or older when 2019 ended, you can wait to take your first RMD until age 72. If you were 70½ at the end of 2019, the old rules still apply, and your initial RMD deadline is April 1, 2020. Your second RMD will be due on December 31, 2020.1,2

Keep in mind that withdrawals from traditional, SIMPLE, and SEP-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.

To qualify for the tax-free and penalty-free withdrawal of earnings from a Roth IRA, your Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

April 15, 2020 is the deadline for making annual contributions to a traditional IRA, Roth IRA, and certain other retirement accounts.3

The earlier you make your annual IRA contribution, the better. You can make a yearly IRA contribution any time between January 1 of the current year and April 15 of the next year. So, the contribution window for 2019 started on January 1, 2019 and ends on April 15, 2020. Accordingly, you can make your IRA contribution for 2020 any time from January 1, 2020 to April 15, 2021.4

You may help manage your income tax bill if you are eligible to contribute to a traditional IRA. To get the full tax deduction for your 2019 traditional IRA contribution, you have to meet one or more of these financial conditions:

• You aren’t eligible to participate in a workplace retirement plan.

• You are eligible to participate in a workplace retirement plan, but you are a single filer or head of household with Modified Adjusted Gross Income (MAGI) of $64,000 or less. (Or if you file jointly with your spouse, your combined MAGI is $103,000 or less.)5

• You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible and your combined 2019 gross income is $193,000 or less.6

Thanks to the SECURE Act, both traditional and Roth IRA owners now have the chance to contribute to their IRAs as long as they have taxable compensation (and in the case of Roth IRAs, MAGI below a certain level; see below).1,4

If you are making a 2019 IRA contribution in early 2020, you must tell the investment company hosting the IRA account which year the contribution is for. If you fail to indicate the tax year that the contribution applies to, the custodian firm may make a default assumption that the contribution is for the current year (and note exactly that to the I.R.S.).

So, write “2020 IRA contribution” or “2019 IRA contribution,” as applicable, in the memo area of your check, plainly and simply. Be sure to write your account number on the check. If you make your contribution electronically, double-check that these details are communicated.

How much can you put into an IRA this year? You can contribute up to $6,000 to a Roth or traditional IRA for the 2020 tax year; $7,000, if you will be 50 or older this year. (The same applies for the 2019 tax year). Should you make an IRA contribution exceeding these limits, you have until the following April 15 to correct the contribution with the help of an I.R.S. form. If you don’t, the amount of the excess contribution will be taxed at 6% each year the correction is avoided.3,4

The maximum contribution to a Roth IRA may be reduced because of Modified Adjusted Gross Income (MAGI) phaseouts, which kick in as follows.

2019 Tax Year7
• Single/head of household: $122,000 – $137,000
• Married filing jointly: $193,000 – $203,000          

2020 Tax Year8
• Single/head of household: $124,000 – $139,000
• Married filing jointly: $196,000 – $206,000

The I.R.S. has other rules for other income brackets. If your MAGI falls within the applicable phase-out range, you may be eligible to make a partial contribution.7,8 A last reminder for those who turned 70½ in 2019: you need to take your first traditional IRA RMD by April 1, 2020 at the latest. The investment company that serves as custodian (host) of your IRA should have alerted you to this deadline; in fact, they have probably calculated the RMD amount for you. Your subsequent RMD deadlines will all fall on December 31.2

Do you have any questions? Please contact us! info@aeinvestmentsgroup.com, 215-766-7002.

Citations
1 – marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [1/8/20]
2 – kiplinger.com/article/retirement/T045-C000-S001-the-deadline-for-your-first-rmd-is-april-1.html [3/29/19]
3 – irs.gov/retirement-plans/ira-year-end-reminders [11/8/19]
4 – irs.gov/retirement-plans/traditional-and-roth-iras [1/8/20]
5 – irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work [11/18/19]
6 – irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work [11/18/19]
7 – irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 [11/18/19]
8 – irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2020 [11/8/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Ways to Fund Special Needs Trusts

Brent E Chavez

Ways to Fund Special Needs Trusts

A look at the different options & strategies.

If you have a child with special needs, a trust may be a financial priority. There are many crucial goods and services that Medicaid and Supplemental Security Income might not pay for, and a special needs trust may be used to address those financial challenges. Most importantly, a special needs trust may help provide for your disabled child in case you’re no longer able to care for them.

In planning a special needs trust, one of the most pressing questions is: when it comes to funding the trust, what are the options?

There are four basic ways to build up a third-party special needs trust. One method is simply to pour in personal assets, perhaps from immediate or extended family members. Another possibility is to fund the trust with permanent life insurance. Proceeds from a settlement or lawsuit can also serve as the core of the trust assets. Lastly, an inheritance can provide the financial footing to start and fund this kind of trust.

Families choosing the personal asset route may put a few thousand dollars of cash or other assets into the trust to start, with the intention that the initial investment will be augmented by later contributions from grandparents, siblings, or other relatives. Those subsequent contributions can be willed to the trust, or the trust may be named as a beneficiary of a retirement or investment account.1

When life insurance is used, the trustor makes the trust the beneficiary of the policy. When the trustor dies, the policy’s death benefit is left, tax free, to the trust.2

A lump-sum settlement or inheritance can be invested while within the trust, inviting the possibility of growth and compounding. With a worthy trustee in place, there is less likelihood of mismanagement, and funds may come out of the trust to support the beneficiary in a measured way that does not risk threatening government benefits.

The trust may also be funded with tangible, non-cash assets. Examples include real estate, securities, collections of cars or art or antiques, or even a business. These assets (and others like them) can be left to the trustee of the special needs trust via a revocable living trust or will. Just remember that the goal of the trust is to provide the trust beneficiary with cash. Those tangible assets will need to be sold or liquidated to meet that objective.1

Currently, it costs about $3,500 to design a basic special needs trust. Given that initial expense and ongoing administrative costs, most families aim to place at least $100,000 inside these vehicles. The typical trustee is a bank – or more precisely, a bank’s trust division – and annual administration fees commonly range from 0.5% to 1.5%. If the trustee is a relative of the child or a close friend of the family, administration may be done for free or at minimal cost.3 

Care must be taken not only in the setup of a special needs trust, but in the management of it as well. This should be a team effort. The family members involved should seek out legal and financial professionals who are well versed in this field, and the resulting trust should be a product of close collaboration.

Questions? Please contact us: 215-766-7002, info@aeinvestmentsgroup.com

Citations
1 – specialneedsanswers.com/the-top-7-reasons-to-establish-a-special-needs-trust-13358 [7/3/19]
2 – specialneedsanswers.com/funding-a-special-needs-trust-with-life-insurance-the-basics-17359 [10/2/19]
3 – barrons.com/articles/their-child-has-special-needs-heres-how-theyre-planning-for-assistance-51575032400 [11/29/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Annual Financial To-Do List

Brent E Chavez

Annual Financial To-Do List

Things you can do for your future as the year unfolds.

What financial, business, or life priorities do you need to address for the coming year? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:

Can you contribute more to your retirement plans this year? In 2020, the contribution limit for a Roth or traditional individual retirement account (IRA) remains at $6,000 ($7,000, for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $139,000 and joint filers with MAGI above $206,000 cannot make 2020 Roth contributions.1

Before making any changes, remember that withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.2

Make a charitable gift. You can claim the deduction on your tax return, provided you itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the Internal Revenue Service (I.R.S.) does not equate a pledge with a donation. If you pledge $2,000 to a charity this year, but only end up gifting $500, you can only deduct $500.3

These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your strategy. 

See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.4

Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,550 contribution for 2020, if you are single; $7,100, if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.5

If you spend your HSA funds for nonmedical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pretax accounts, and your most tax-efficient securities should be held in taxable accounts.

Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Before adjusting your asset allocation, consider working with an investment professional who is familiar with tax rules and regulations. 

Review your withholding status. Should it be adjusted due to any of the following factors?

  • You tend to pay a great deal of income tax each year.
  • You tend to get a big federal tax refund each year. 
  • You recently married or divorced.
  • A family member recently passed away.
  • You have a new job and you are earning much more than you previously did. 
  • You started a business venture or became self-employed. 

These are general guidelines and are not a replacement for real-life advice. So, make certain to speak with a professional who understands your situation before making any changes.

Are you marrying in 2020? If so, why not review the beneficiaries of your retirement accounts and other assets? When considering your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2020, you will need a new Social Security card. Additionally, the two of you may have retirement accounts and investment strategies. Will they need to be revised or adjusted with marriage?

Are you coming home from active duty? If so, go ahead and check the status of your credit as well as the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still there and revoke any power of attorney you may have granted to another person.

Consider the tax impact of any upcoming transactions. Are you planning to sell any real estate this year? Are you starting a business? Do you think you might exercise a stock option? Might any large commissions or bonuses come your way in 2020? Do you anticipate selling an investment that is held outside of a tax-deferred account? 

If you are retired, and in your seventies, remember your RMDs. In other words, Required Minimum Distributions (RMDs) from traditional retirement accounts.There is a new development to report on this, as the Setting Every Community Up for Retirement Enhancement (SECURE) Act just altered a key rule pertaining to these mandatory withdrawals.Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking RMDs from most types of these accounts. The previous “starting age” was 70½.6

This new RMD rule applies only to those who will turn 70½ in 2020 or later. If you were 70½ when 2019 ended, you must take your initial RMD(s) by April 1, 2020, at the latest.6

If you have already begun taking RMDs, your annual deadline for them becomes December 31 of each year. The I.R.S. penalty for failing to take an RMD can be as much as 50% of the RMD amount that is not withdrawn.6

Vow to focus on being healthy and wealthy in 2020. And don’t be afraid to ask for help from professionals who understand your individual situation.

Do you have any questions? Please feel free to reach out to me at bchavez@aeinvestmentsgroup.com.

Citations
1 – thefinancebuff.com/401k-403b-ira-contribution-limits.html [7/16/19]
2 – kiplinger.com/article/retirement/T032-C000-S000-how-much-can-you-contribute-traditional-ira-2020.html [1/10/20]
3 – irs.gov/newsroom/charitable-contributions [6/28/19]
4 – nerdwallet.com/blog/taxes/home-office-tax-deductions-small-business/ [1/22/19]
5 – cnbc.com/2019/06/03/these-are-the-new-hsa-limits-for-2020.html [6/4/19]
6 – thestreet.com/retirement/secure-retirement-act-makes-big-changes-to-how-you-save [12/21/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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New I.R.S. Contribution Limits

Brent E Chavez

New I.R.S. Contribution Limits

Changes for 2020.

The I.R.S. increased the annual contribution limits on IRAs, 401(k)s, and other widely used retirement plan accounts for 2020. Here’s a quick look at the changes.

• You can put up to $6,000 in any type of IRA. The limit is $7,000 if you will be 50 or older at any time in 2020.1,2

• Annual contribution limits for 401(k)s, 403(b)s, the federal Thrift Savings Plan, and most 457 plans also get a $500 boost for 2020. The new annual limit on contributions is $19,500. If you are 50 or older at any time in 2020, your yearly contribution limit for one of these accounts is $26,000.1,2

• Are you self-employed, or do you own a small business? You may have a solo 401(k) or a SEP IRA, which allows you to make both an employer and employee contribution. The ceiling on total solo 401(k) and SEP IRA contributions rises $1,000 in 2020, reaching $57,000.3

• If you have a SIMPLE retirement account, next year’s contribution limit is $13,500, up $500 from the 2019 level. If you are 50 or older in 2020, your annual SIMPLE plan contribution cap is $16,500.3

• Yearly contribution limits have also been set a bit higher for Health Savings Accounts (which may be used to save for retirement medical expenses). The 2020 limits: $3,550 for individuals with single medical coverage and $7,100 for those covered under qualifying family plans. If you are 55 or older next year, those respective limits are $1,000 higher.4

Have questions? Please contact us at (215) 766-7002 or info@aeinvestmentsgroup.com.

Citations
1 – irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits [11/8/19]
2 – irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500 [11/6/19]
3 – forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/ [11/6/19]
4 – cnbc.com/2019/06/03/these-are-the-new-hsa-limits-for-2020.html [6/4/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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The SECURE Act

Brent E Chavez

The SECURE Act

Long-established retirement account rules change.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is now law. With it, comes some of the biggest changes to retirement savings law in recent years. While the new rules don’t appear to amount to a massive upheaval, the SECURE Act will require a change in strategy for many Americans. For others, it may reveal new opportunities.

Limits on Stretch IRAs. The legislation “modifies” the required minimum distribution rules in regard to defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.1

It’s important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance.

A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements. 

Let’s say that a person has a hypothetical $1 million IRA. Under the new law, your non-spouse beneficiary may want to consider taking at least $100,000 a year for 10 years regardless of their age. For example, say you are leaving your IRA to a 50-year-old child. They must take all the money from the IRA by the time they reach age 61. Prior to the rule change, a 50-year-old child could “stretch” the money over their expected lifetime, or roughly 30 more years.

IRA Contributions and Distributions. Another major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions as long as you meet the earned-income requirement.2

Also, as part of the Act, you are mandated to begin taking required minimum distributions (RMDs) from a traditional IRA at age 72, an increase from the prior 70½. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income.2

The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020. For these taxpayers, RMDs will become mandatory at age 72. If you meet this criterion, your first RMD won’t be necessary until April 1 of the year after you reach 72.2

Multiple Employer Retirement Plans for Small Business. In terms of wide-ranging potential, the SECURE Act may offer its biggest change in the realm of multi-employer retirement plans. Previously, multiple employer plans were only open to employers within the same field or sharing some other “common characteristics.” Now, small businesses have the opportunity to buy into larger plans alongside other small businesses, without the prior limitations. This opens small businesses to a much wider field of options.1

Another big change for small business employer plans comes for part-time employees. Before the SECURE Act, these retirement plans were not offered to employees who worked fewer than 1,000 hours in a year. Now, the door is open for employees who have either worked 1,000 hours in the space of one full year or to those who have worked at least 500 hours per year for three consecutive years.2

While the SECURE Act represents some of the most significant changes we have seen to the laws governing financial saving for retirement, it’s important to remember that these changes have been anticipated for a while now. If you have questions or concerns, reach out to your trusted financial professional.

Have questions? Please contact us at (215) 766-7002 or info@aeinvestmentsgroup.com.

Learn more about Brent E Chavez, the Services We Provide, or Why Choose AE?

Citations
1 -waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf  [12/25/19]
2 – marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [12/25/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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The Sequence of Returns

Brent E Chavez

The Sequence of Returns

A look at how variable rates of return do (and do not) impact investors over time.

What exactly is the “sequence of returns”? The phrase describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?

The answer: no impact at all.

Once an investor retires, however, these ups and downs can have an effect on portfolio value – and retirement income.

During the accumulation phase, the sequence of returns is ultimately inconsequential. Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)

An analysis from BlackRock bears this out. The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three situations, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case.1

Here is another way to look at it. The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be.1

When you shift from asset accumulation to asset distribution, the story changes. You must try to protect your invested assets against sequence of returns risk.

This is the risk of your retirement coinciding with a bear market (or something close). Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.

For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision. The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives 37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year. 2, 3

If you are about to retire, do not dismiss this risk. If you are far from retirement, keep saving and investing, knowing that the sequence of returns will have its most relevant implications as you make your retirement transition.

Have questions? Please contact us at (215) 766-7002 or info@aeinvestmentsgroup.com.

Learn more about Brent E Chavez, the Services We Provide, or Why Choose AE?

Citations
1 – blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf [10/19]
2 – kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html [7/3/18]
3 – thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672 [2/8/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Why DIY Investment Management Is Such a Risk

Brent E Chavez

Why DIY Investment Management Is Such a Risk

Paying attention to the wrong things becomes all too easy.

If you ever have the inkling to manage your investments on your own, that inkling is worth reconsidering. Do-it-yourself investment management is generally a bad idea for the retail investor for myriad reasons.

1. Getting caught up in the moment.
When you are watching your investments day to day, you can lose a sense of historical perspective. This may be especially true in longstanding bull markets, in which investors are sometimes lulled into assuming that the big indices will move in only one direction.

2. Listening too closely to talking heads.
The noise of Wall Street is never-ending and can breed a kind of shortsightedness that may lead you to focus on the micro rather than the macro. As an example, the hot issue affecting a sector today may pale in comparison to the developments affecting it across the next ten years or the past ten years.

3. Looking only to make money in the market.
Wall Street represents only one avenue for potentially building your retirement savings or wealth. When you are caught up in the excitement of a rally, that truth may be obscured. You can build savings by spending less. You can receive “free money” from an employer willing to match your retirement plan contributions to some degree. You can grow a hobby into a business or even switch jobs or careers.

4. Saving too little.
For a DIY investor, the art of investing equals making money in the markets, not necessarily saving the money you have made. Subscribing to that mentality may dissuade you from saving as much as you should for retirement and other goals.

5. Paying too little attention to taxes.
A 10% return is less sweet if federal and state taxes claim 3% of it. This routinely occurs, however, because just as many DIY investors may play the market in one direction, they also may skimp on playing defense.

6. Failing to pay attention to your emergency fund.
You may need more than six months of cash reserves. Many people may not have anywhere near that, and some DIY investors give scant attention to their cash position. 1

7. Overreacting to a bad year.
Sometimes the bears appear. Sometimes stocks do not rise 10% annually. Fortunately, you have more than one year in which to plan for retirement (and other goals). Your long-run retirement saving and investing approach – aided by compounding – matters more than what the market does during a particular 12 months. Dramatically altering your investment strategy in reaction to present conditions can backfire.

8. Equating the economy with the market.
They are not one and the same. Moreover, some investments and market sectors can do well or show promise when the economy goes through a rough stretch.

9. Focusing more on money than on the overall quality of life.
Managing investments – or the entirety of a very complex financial life – on your own takes time. More time than many people want to devote; more time than many people initially assume. That kind of time investment can subtract from your quality of life – another reason to turn to other resources for help and insight.

Have questions? Please contact us at (215) 766-7002 or info@aeinvestmentsgroup.com.

Learn more about Brent E Chavez, the Services We Provide, or Why Choose AE?

Citations
1 – cnbc.com/2019/03/18/how-much-to-save-for-emergencies-comes-down-to-income-spending-habits.html [3/18/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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