Having goals are extremely important to build true wealth. Achieving your financial goals does not just happen by itself. It takes a planning and massive action to implement the plan then being consistently diligent to adhere to the plan especially in the face of uncertainty in the world around us and when your circumstances or goals change, adjusting the plan.
Simply put, failing to plan is planning to fail. Don’t plan to fail!
According to the Department of Labor,
- Only 40% of Americans have calculated how much they need to save for retirement.
- In 2018, almost 30% of private industry workers with access to a 401(k) plan or something similar did not participate.
- The average American spends roughly 20 years in retirement.
Nearly everyone will receive Social Security, but Social Security won’t pay all the bills.
1. Regularly saving is critical. Once you begin an automatic payroll deduction into a retirement account, you won’t miss it. I promise. Reframe your mindset around income, if you earn one dollar, the very first thing you should do is save and invest at the bare minimum 10 cents and base your life on the remaining 90 cents. When I first started saving in my initial goal was to put 10% of pretax income in my 401(k). That’s the first 10 cents of every dollar, before you pay tax, credit cards etc..
But that seemed like a mighty big chunk of cash, at least in the beginning. So, I say to you if you want to change your financial life you must take massive action and begin, remember the first 10 cents of every dollar saved and invested should be your baseline and try to increase your automated savings from there.
Also, if you have 401k plan where your company matches, I can’t overly emphasize the importance of capturing your entire company’s match. It’s free money. Do not leave free cash with your employer.
2. Start as early as you can. I have three kids, ages 7, 4 and 2 when my oldest was first born I established a 529 college savings account and began saving. When I told my father and my wife told my in-laws their response was the same, “Oh you have plenty of time, use the money for something else, go on a trip, or buy yourself something nice, you deserve it” I thought that is the worst advice I could ever get as it won’t be long before my two boys and my daughter are off to college. Good thing I did not heed their advice and I do what I do for a living because we already have a nice chunk of change saved for college and my oldest is only in first grade. For many people, college for little kids or their own retirement 20 or 30 years away is another planet away, if not another universe.
But we all know the magic of compounding. The savings we socked away when we were younger has paid big dividends.
Here’s another story. A friend of mine in his early 50s is semi-retired. Yet, he sometimes laments that he started saving when he was 26 and not 22. For many, he’s ahead of the game, even if he did not start right out of college. Still, his decision to start early and max out his contributions put him on the path to financial freedom.Let’s illustrate by way of example. Tom is 28 years old and plans to save $500/month or $6,000 per year until he retires at 65. With an annual return of 7% (assuming annual compounding), Tom will have amassed $962,024 when he turns 65 years old. Total contributions: $222,000.
Kate decides to put away the same amount. Kate is 22 years old and will save for 43 years. While her time to contribute is only an additional six years, her decision to start early is rewarded with a portfolio of $1,486,659. Total contributions: $258,000.
Because Kate started sooner, the additional $36,000 amounted to an additional $524,635! (Source: Investor.gov Investment Compound Calculator Calculations assume a tax-deferred account.)
3. What plan best fits my need? That question will depend on your personal circumstances. For many, your company’s 401(k) is tailor-made to save for retirement. This is especially true if your firm has a matching contribution.
Whether to fund a traditional IRA or a Roth IRA depends on many factors, including your marginal tax rate today and expected rate in retirement.
A Roth offers tax advantages if you qualify. Generally speaking, withdrawals from a Roth IRA are tax-free in retirement if you are age 59½ or older and have held the account for five years. But you will not capture a tax deduction on contributions.
Current tax law does not require minimum distributions, which can be a big advantage as you travel through retirement.
A Roth may also be advantageous if you do not believe your marginal tax rate will fall much in retirement or if you have outside assets that limit your need to withdraw on your retirement savings.
4. How much will I need at retirement? Again, much will depend on your individual circumstances. Your retirement expenses and lifestyle will dictate your portfolio needs.
An old rule of thumb that you will need 70% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? Or do you plan to downsize, which may reduce or eliminate monthly mortgage outlays?
One approach some folks consider is the 4% rule. It is relatively simple. Withdraw 4% of your total investments in the first year and adjust each year for inflation. Keep in mind, however, that this is a rigid rule. It assumes a 30-year time horizon and minimizes the risk of running out of money.
Depending on Social Security and any pension you may have, a more generous “allowance” from your savings may be in order.
5. How do I find the right mix of investments? What worked when you were 30 years old probably is not appropriate today.
While our advice will vary from investor to investor, we can offer broad guidelines. Furthermore, retirement may be broken into different stages, which may require adjustments to the plan.
Some investors decide it’s best to take a very conservative approach. You know, “I can’t lose what I’ve accumulated because I don’t have time to recoup losses.” But that has its drawbacks. Longevity risk is real, many may live much longer then they anticipate and if you only plan for 20 years and you live 30 or 35 years after retirement, you may be in for a rude awakening (financially speaking).
Please remember equities have historically offered more robust returns over the long term may still be an important part of an investment strategy helping you stay ahead of inflation and taxes which if not planned and invested for correctly can potentially erode your capital from the inside like termites eating away at your home.
Others may be swept up by what might be called “FOMO.” Fear of Missing Out- Stocks have surged, which may encourage investors to load up on risk. However, a comprehensive financial plan helps remove the emotional component that can creep into decisions.
6. I have saved all my life. How do I begin withdrawing from my savings? It is a complete shift in the paradigm. No longer are you socking away a percentage of each paycheck. Instead, you are living off your savings.
First, if you are required to take a minimum distribution from a tax deferred account, take it. Next, consider interest, dividends and capital gains distributions from taxable investments, which continues to tax shelter assets in retirement accounts. If additional funds are needed, consider withdrawals from your IRA or other tax-deferred accounts. If you are in high tax bracket, you may consider pulling from your Roth. Those in a lower tax bracket could leave the Roth alone and take funds from their traditional IRA.
Let me reiterate that many of these principles are simply guidelines. One size does not fit all. Plans we suggest are tailored to one’s specific needs and goals. If you have any questions, we would be happy share our recommendations. We are simply a phone call or email away!
What happened in September?
The S&P 500 Index surged an impressive 60% from the March 23 bottom to the most recent high in early September (St. Louis Fed S&P 500 data). But stocks hit a roadblock in September.
|Dow Jones Industrial Average||-2.3||-2.7|
|S&P 500 Index||-3.9||4.1|
|Russell 2000 Index||-3.5||-9.6|
|MSCI World ex-USA*||-3.1||-9.0|
|MSCI Emerging Markets*||-1.8||-2.9|
|Bloomberg Barclays US Aggregate Bond TR||-0.1||6.8|
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD return: Aug 31, 2020-Sep 30, 2020
YTD return: Dec 31, 2019-Sep 30, 2020
Given the incredible run, a pullback was inevitable. But as I have counseled before, the timing, magnitude and duration of a pullback is impossible to predict. Your success is based, at least in part, on time in the market, not timing the market.
There were several factors that played a role in last month’s pullback.
- Any uncertainty creates a good excuse to take profits after a big run-up in price.
- Daily Covid cases in the U.S. ticked higher last month, per Johns Hopkins data.
- While it will not be cheap, Congress has yet to find common ground on a new fiscal stimulus bill. The economic bounce in Q3 has been much stronger than most initially thought possible. But investors and many analysts believe more support is needed.
- Finally, the election is front and center. We may not have a winner on election night. Worse, a disputed election would add to investor angst.
President Trump and the first lady tested positive for Covid-19, injecting a new round of uncertainty into an already tumultuous election. How this may play out is unknown, as we are in uncharted waters.
Much will depend on the path of the virus, but heightened uncertainty does put a damper on investor sentiment. [The situation is fluid. Please adjust as you see fit.]
Amid hostility on both sides, let me first say that my role is to be your wealth advisor. I have worked hard to earn your trust. I am not a political analyst. I am here to guide you as you journey toward your financial goals.
Therefore, I will carefully and cautiously review the current contest through a very narrow prism–through the eyes of a dispassionate investor focused on the economic fundamentals and how that might impact equities over the long-term.
Let us consider these historical facts.
- Stocks have performed well under the historic leadership in both parties.
- The conventional wisdom is not always right. Recall that stocks were not supposed to do well with a Trump win, as investors wanted the continuity a Hillary Clinton presidency would offer.
- Compromise and gridlock may engulf a dominant party, as a one-sided win tends to expose party divisions. Remember how Republicans would quickly repeal Obamacare?
Some investors fret that a Biden win would lead to higher corporate taxes and heap more regulations on businesses. But might we see more fiscal stimulus and an easing in trade tensions, which could support shares? Longer term, stocks march to the beat of the economy, Fed policy and corporate profits. A growing economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. In my opinion, that is not about to change.
I trust you have found this review to be helpful and educational.
We have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I am here for.
As always, we at Gold Family Wealth are honored and humbled that you have given us the opportunity to serve as your wealth advisor.
Michael Gold, CFP®, MBA
Founder & CEO, Wealth Advisor
Toll Free 800.303.2533
Gold Family wealth, LLC
500 Post Road East Ste 242
Westport CT 06880