(501) 823-4637

info@hagan-newkirk.com

Should You Earn More Money or Spend Less Money to get Out of Debt?

Should You Earn More Money or Spend Less Money to get Out of Debt?

Should You Earn More or Spend Less?

 

Debt can be so overwhelming… Whether it’s student loan debt or credit card debt, it all hurts your wallet the same way. If you want to pay it off, you have to decide between two things… or do you?

 

Is Spending Less Money the Best Option?

 

When you are in debt, you hear often that you need to spend less money if you ever want to get out of debt. The most frequent phrase used on this side of the argument is the “latte factor”. Basically, this phrase is saying that you should cut out a latte a day to get out of debt or invest in your future. It does not just mean lattes, however, it is talking about any unnecessary expenses. Maybe, you do not need cable anymore because you only watch Netflix and Hulu.

The big advantage of this side is that the results are immediate. If you cut out cable, you will immediately have that money in the bank. However, the disadvantage is that you can only cut so much… Also, sometimes you need a good latte to start your day better and you do not want to cut them.

 

Is Earning More the Best Option?

 

The other side of the argument is this; instead of giving up things you enjoy, you should earn more money, so that, you can afford those things while also paying off your debt. One way to create extra income for yourself is by starting a side hustle. Find something that you enjoy and start getting paid to do it. Another way to earn more money is by simply asking for a raise.

The advantage with this side is that there is no cap on how much money you can make. Also, you can continue to enjoy those lattes guilt free. The disadvantage is the time it takes to get a side hustle started.

 

The Answer

 

The best way to get out of debt or start saving for your future is to do both… Shocking, right? It does not matter how much money you make, if you do not know how to manage it, you will struggle. Plenty of athletes have made millions of dollars a year and are now bankrupt. However, sacrificing every little thing can be overwhelming and annoying.

That is why a combination of both spending less and earning more is the way to go. Everyone needs to know how to budget their money wisely, no matter how much they make. Also, the best part about the “earning more side” is that you may find a new passion and career. So, in conclusion, budget the money you do have, wisely, and begin earning extra money on the side.

 We are here to assist you with your planning and investing, so you can focus on living.
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How to Increase Employee Participation in Your Company’s Retirement Plan

All employers want to increase participation in their retirement plans, right? We may all want it, but do our actions drive an increase in participation? Maybe not…

First thing that any plan sponsor has to do, before they can increase participation, is to define what “increase participation” is for their plan. Maybe, “increase participation” means that you want the people that are already contributing to contribute more. Or maybe, you want more of your employees contributing to the plan. Either way make sure to define what it means to increase participation for you and your plan.

Many plan sponsors assume fixing one part of their plan will automatically increase participation. So, they lower fees or allow for Roth contributions or etc., but still not much growth within the plan. Maybe they improve the company match, but no change in behavior. The problem is that they might not be looking at the plan holistically or how those changes synchronize with education to the participants. They fix one aspect to the plan hoping that betters participation amongst all employees.

Sponsoring a retirement plans is much more complex these days. Increasing the company match and lowering the fees are great efforts to do and should be done when possible, but if your employees are not EDUCATED on how to use your plan effectively or made familiar with the changes you are implementing, those things will not help your plan grow consistently, thus benefit your employees. It is critical that you have support structures in place that help educate all of your employees, not just those in the “C suites” or highly compensated, on how to manage money and save efficiently for retirement. That education support becomes the foundation for effective and sustained increased participation.

Why does this matter?

It matters because it’s costing you… 

A primary goal of any retirement plan is to obtain and retain quality employees. Your retirement plan should be attractive to potential employees while also staying current with services, options and low fee structures, so that, you can retain those employees. That is why the Department of Labor (DOL) recommends that you benchmark your plan every 3 years. Also, when employees are not at a healthy place financially, they are distracted at work. This costs your company money because they do not perform their job effectively, reducing productivity.

Another goal for your retirement plan is to help your older employees achieve a dignified retirement. Accomplishing this is not only the right thing to do for your employees, but it is also good for business.

You have the responsibility, as a leader in your company, to act with the best interest of your employees. It can be frustrating when you feel like you have all the right pieces in place for your retirement plan, but still have a low participation rate. We believe that if you have a process in place that helps to educate your employees on the importance of retirement savings and how to utilize the benefits offered by their employer, plan participation will increase.

Please, don’t hesitate to reach out to us if you have any questions about how to customize and implement a process for you and your plan.

Want to know how Hagan Newkirk increases participation for their clients?

 We are here to assist you with your planning and investing, so you can focus on living.
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Are We Comfortable with the Uncomfortable?

Are we now comfortable with the uncomfortable?

Notching its eighth consecutive quarterly advance, the S&P 500 rose approximately 4.4% in the past three months. What’s more remarkable is the resiliency of the market in the face of events that would historically cause periods of panic, leading to increased volatility as equity markets sell off and investors flock to the safety of bonds. In years past, life altering events typically force the market into disarray; however, despite recent events such as the standoff with North Korea, the multitude of natural disasters, the Charlottesville unrest, Catalan turmoil in Spain and the Las Vegas shooting, the equity markets keep shrugging off every occurrence and continue chugging along. The lack of inflation, steady economic growth, accommodative monetary policy, strong labor market and very strong earnings growth have created a robust tailwind for equities, creating a sense of investor complacency with what would traditionally be viewed as an uncomfortable turn of events.
Although Small Caps have made up some ground in the third quarter, US Large Caps have still held the edge for the year, with the S&P 500 and Russell 2000 posting returns of 14.24% and 10.94%, respectively. Technology continues to drive US the market higher, as evidenced by the 20.67% NASDAQ year-to-date return. While domestic stocks have posted strong returns, they have been outdone by foreign equity markets, as the MSCI EAFE index, representing developed international equities, was up 20.47%, and the MSCI Emerging Markets index posted a return of 28.14%. Bonds continued their yo-yo year, in which the yield curve continued to flatten, and interest rates fell to 2.04% on the 10-Year Treasury, before bouncing up above 2.3% in the final weeks. These movements were a net positive for the returns in the bond market, as the Barclay’s US Aggregate Bond Index is returning 3.14% for the year.

Long economic cycle might get longer 

While we are going on our ninth year of economic expansion, many have started to speculate that based upon the duration of the expansion alone, the end must be in sight. Recessions are generally caused by one of three incidents: growing inflation to the point central banks believe it must be contained, a monetary policy error of some kind and/or an exogenous event. Wage growth tends to be a strong barometer, as when wage growth typically reaches the 4% level, both a recession and inverted yield curve are close behind. Today’s 2.5% wage growth and sub-2% QUARTERLY CLIENT UPDATE inflation suggests we have a long way to go. Consumers continue to be the economy’s workhorse, increasing their spending at a 2.7% clip, while drawing down savings. The upcoming holiday season should provide valuable insight into consumer demand. The labor market continues to tighten, as we move into full employment levels, with a 4.4% unemployment rate, and upward trending, albeit slow, wage growth. Manufacturing continues to show steady improvement, as new orders have been increasing alongside declining inventories. The bevy of natural disasters experienced in recent months truly devastated many communities; it’s our belief that they will disrupt and negatively impact economic activity in the near term, as already witnessed by the disturbances in unemployment claims and housing. However, history would suggest that storms are unlikely to materially impact the course of the economy over the medium term, and given the current momentum, we anticipate our moderate growth continue.

The tale of the Fed and the “mystery” of the missing inflation 

In the world of central bank transparency which we now live, the Federal Open Market Committee (FOMC) delivered as previously signaled, and in their September meeting they decided against a current rate increase and officially announced the unwinding of their $4.5 trillion balance sheet, starting in October. What the market did find surprising was the Fed’s apparent determination to raise rates once more in 2017, and three times in 2018. Speculators saw the odds of the Fed raising rates in December jump from approximately 20% to over 70%.
The Fed has been cautious in their approach to balance sheet reductions in efforts to avoid another instance such as the “Taper Tantrum” we experienced in 2013. As we outlined earlier in the year, they will institute a system of monthly caps, limiting the amount of Treasuries and mortgage bonds that can roll off the balance sheet in any given month. Currently, as assets on the balance sheet mature, the proceeds are reinvested. Once the Fed begins to implement their strategy, rather than investing all of the maturing proceeds, they will allow a capped dollar amount to “roll off” and not be invested. Treasuries’ initial cap will be $6 billion per month, set to increase by $6 billion each quarter until reaching a maximum of $30 billion a month. US Agency and mortgage bonds will have an initial cap of $4 billion, set to increase by $4 billion per quarter until reaching a maximum of $20 billion a month. Any maturities in excess of those caps will be reinvested. The total balance sheet run-off in the first year could reach as high as approximately $300 billion. While no official target balance sheet size has been released, several Fed governors have suggested a range of $2 to $2.5 trillion. As a point of reference, in 2008, the balance sheet was approximately $800 billion.
Given their plans to raise rates four times between now and the end of 2018, along with the autopilot program they’ve put in place for balance sheet reduction, it would appear that the Fed is starting to move away from their data-dependency mantra of years past. Fed Chair Janet Yellen’s acknowledgment that the fall in inflation this year is a bit of a “mystery,” and further suggestion that the central bank stays the course and increases rates, surprised the markets and goes to demonstrate that the Fed is bent on normalizing, regardless of inflation figures. Apparently, the Fed is perceiving the falling inflation as transitory, but given the downward trend over the last year, it’s getting harder to classify falling inflation as such. Rising inflation tends to push bond yields higher via expectations, but inflation has been trending lower, which is a primary reason rates are lower on the 10-Year Treasury today than they were at the start of the year. We expect that it will take a more substantial uptick in wage growth to truly drive inflation, and will be watching carefully to see the impact of the Fed’s game plan for 2018.

Can Washington remove their dysfunction in order to function? 

The market and the Fed have essentially determined that any fiscal impact as a result of policy initiatives will be pushed into 2018. After several attempts and failures, it appears the GOP has finally accepted that the Affordable Care Act will not be overturned in 2017, if at all, as they have quickly pivoted their attention to tax reform. The initial attempt at tax reform was proposed at the end of the quarter, with some rather lofty suggestions which could alter our tax landscape significantly. The most impactful adjustment to the tax reform framework would be the reduction in the Corporate Tax Rate to 20% and the equalization of pass through entities – effectively lowering the tax rate on small businesses. Significant change would also be in order for individuals, with the doubling of the standard deduction in an attempt to provide tax relief to the middle class, a move to three individual tax brackets – lowering the top income tax rate to 35%, the elimination of the state and local tax (SALT) deduction and the removal of estate taxes and step-up in basis provisions. The proposal also has a somewhat surprising proposal for the Rothification of retirement savings – forcing people out of traditional retirement plans and toward Roth plans by removing the ability to deduct or save for retirement on a pretax basis. While seeking approval for the proposed tax reform framework will be faced with difficulties, it’s only one step in the two step process. Step one involves the passage of a budget resolution, which is absolutely critical for tax reform, since it creates the reconciliation protection for the Senate to pass tax legislation with 51 votes. While we ultimately believe a budget resolution will be reached in the fourth quarter, there are many reasons the budget resolution could be met with opposition. For instance, House conservatives will want more spending cuts, which would make passing through the Senate unlikely. House conservatives might want more details on tax reform prior to opening up the reconciliation window. Moderate House members from high-tax states could be up in arms over the possibility of losing state and local tax deductions.
Clearly tax reform has a long road ahead to push any of the reform framework through, and that’s not even taking into consideration that the Democrats possess significant leverage in negotiations as the debt ceiling still lingers. President Donald Trump made a surprise move and sided with the Democrats to provide aide to hurricane victims, and in doing so kicked the proverbial debt ceiling can down the road until December. While many applauded the bipartisan move to lift the debt ceiling, it will be difficult for the Republicans to push a budget through that expands the deficit by $1.5 trillion, and subsequently convince the Democrats to lift the debt ceiling to fund these cuts.

Divergence making for good opportunities outside of America 

On the back of extremely accommodative monetary policy, the United States’ markets rebounded strongly as they lead the way out of the Great Recession. Monetary policy served as steroids to the equity markets as they continued to push higher. Central banks around the world eventually followed suit and started to implement their own forms of Quantitative Easing (QE), or the buying of bonds to limit the money supply and keep long term interest rates compressed. Unlike the US, foreign markets remained directionless for several years; however, as the world’s economies have recovered, we are enjoying a coordinated global expansion, mixed with diverging monetary policies. As previously discussed, the United States has started down their path to normalcy, while the rest of the world continues to practice accommodation and have a pro-growth mindset. As the major political risks have subsided in Europe, the region has now turned attention to the economy, where growth is positive, sentiment is strong and unemployment continues to fall. Even though the market continues to disregard what’s transpiring in Spain and the Catalan referendum, we are closely monitoring as a potential short-term risk and otherwise look to the 2018 elections in Italy as the next major political headwind.
The outlook for foreign stocks remains favorable with strong corporate profit growth, accommodative credit conditions and low inflation. Foreign equities continue to perform well, and have been enhanced in 2017 by weakness in the dollar. Despite the recent outperformance, we still favor the relative valuations of international equity relative to the US, particularly in continental Europe and Japan, where monetary policy continues to accommodate over the United Kingdom as they continue to deal with fallout from Brexit.
We remain optimistic and view the risk and opportunities in emerging markets as fairly balanced as we finish out 2017. Of particular note are China’s maturing economy and the emerging market middle class. While all signs point to China achieving their 2017 growth target, we believe China may experience a slowdown in 2018, as authorities engage in tightening credit conditions in order to reduce financial system risk and reliance on credit expansion. We will re-evaluate our positions in the intermediate term future.

Conclusion 

The first three quarters have been incredibly smooth for investors, and the fourth quarter has historically been strong for equities. While all economic signs point toward continued improvement, volatility often resurfaces at unforeseen times. Though we remain positive in our outlook, we would urge continued prudence by investors in maintaining proper diversification, as well as conviction in a long-term approach, should an unexpected period of rocky market conditions surface. We will continue to closely monitor new data as it becomes available. In addition, we will make adjustments if needed as we wind down the year. As always, please feel free to contact your advisor with any questions, or to set up your next review.
Eric Krause, CFA

Portfolio Manager

Investment Advisory Committee

ekrause@primecap-ia.com

Chris Osmond, CFA, CFP*

Director

Wealth Advisory Services

cosmond@primecap-ia.com

CLICK HERE to request a free Wealth Managment Consultation.

 

 We are here to assist you with your planning and investing, so you can focus on living.
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Investment Allocations That Are the Right Fit For Your Company’s Employees

Hagan Newkirk Provides Investment Allocations That Are the Right Fit For Your Company’s Employees (Participants)

As an Employer it is important to provide your employee retirement plan participants with great fiduciary services but it is also important to provide them with great participant service, what we like to call “eyeball to eyeball services”, taking care of employee participants one-on-one, face-to-face. Hagan Newkirk advisors are experts at dismantling the notion that investing has to be “difficult” and “hard”, making it much easier for employers to help their employees successfully plan for long term financial stability.

It is important of course to understand that every employee/participant is different. Participants are either usually on the offensive with their financial planning (they are young, just starting out with limited savings) or on they are on the defensive (they are older, several years into their career with established savings).

For those that are young, don’t have much money in your account and are just starting out in your career, you need to play offense with your approach to financial planning and investment allocations.

Offensive Financial Planning:

  • Typically makes sense for individuals under the age of 50
  • Diversification is important, portfolios should be allocated so that individuals feel they can “stick to” the game plan, no matter what the market does, they are willing to take long term risk
  • Most often 90 – 95% of investments are allocated toward stock, 60 -65% of the stock will be domestic with the rest being international

For those that are further along in their career and have been able to save a sizable balance, this individual should play a little more Defense with their approach to financial planning.

Defensive Financial Planning:

  • Typically makes sense for individuals 65 and older (but can be case specific too based on the individual’s risk tolerance)
  • A more balanced approach is typical, with diversification still being very important
  • 60% allocated toward stock investments, 40% bonds or fixed income invests that are more conservative

Hagan Newkirk offers 5 “Pre-built” Risk Based Portfolios. These portfolios are what the majority of employees/participants choose. These portfolios are what we like to call the “Do it For Me” option for participants. The graphic below illustrates the amount of Stocks vs. Conservative Fixed Income Investments that each of our 5 Risk Based Portfolios consist of.


The benefit of “Do it For Me” option are the highly experienced financial advisors at Hagan Newkirk who know the financial industry and market well. Expertise means Hagan Newkirk can better manage participant portfolios, creating the best possible allocations based on their knowledge of market timing and other industry factors. Our team helps employers help their employees navigate the road financial success.

Not every participant will fit into or want to enroll in the “Do it For Me” option.

  • Participants that don’t need any help at all from Hagan Newkirk advisors, but may have a question or two that they need guidance on occasionally.
  • Participants who are interested in doing things for themselves but would like Hagan Newkirk’s advice on selecting investments and allocations.

For these employees, Hagan Newkirk advisors are still available as a valuable resource, to provide advice and guidance if and when it may be needed by the employee.

CLICK HERE to request a free 30 minute initial Qualified Plan Consultation
 
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If you don’t currently have a plan, we’ll discuss options.  If you already have a plan we’ll discuss how it is set-up and how we can improve it!

You can call us directly or visit our office too!

Hagan Newkirk  |  Plan, Invest, Live

Central Arkansas Corporate Office
6235 Ranch Drive
Little Rock, AR 72223
Phone:  (501) 823-4637
Email:  info@hagan-newkirk.com

Life Insurance: A Key Component of a Financial Planning

Life Insurance: A Key Component of a Financial Plan

If asked what comes to mind when thinking of financial planning, many would likely mention topics such as saving for retirement, planning for college, creating strategies for retirement income, or structuring a portfolio with an eye toward maximizing tax efficiency. Indeed, planning for our later years, or saving to accomplish certain goals, tend to be the primary focus for many in financial planning. Equally important, we believe, is the importance of incorporating life insurance strategies into a financial plan that will address specific needs such as providing for loved ones, or ensuring a business’ continuity, if and when one is gone.

Life Insurance: The Major Types

When considering life insurance, there are essentially two types: permanent, and term. Broadly speaking, permanent policies are designed to cover the insured over his or her lifetime, while term policies provide coverage that spans a specified time period. Regardless of whether one chooses term or permanent coverage, however, the death benefit bypasses time consuming probate proceedings, and typically passes directly to the insured’s beneficiaries free of income taxes.

Term insurance can be categorized as “group term”- low cost insurance offered to a group of individuals, such as the employees of a company or business, or “individual term”- coverage that is purchased by an individual for a certain period of time such as 5, 10 or 15 years. Given that term policies are designed to provide a death benefit only, term insurance is typically less expensive, at least initially, compared to permanent policies. Once the term expires, however, any renewal of the policy will typically be met with an increase in premiums.

In contrast to term insurance, permanent policies are designed to provide a lifetime of coverage, with the two main types of permanent insurance being “whole life,” and “universal life.” With whole life policies, annual premium costs are initially higher than those of term policies, but they remain constant over the life of the policy. Furthermore, in addition to covering the insurance cost that provides for the policy’s death benefit, a savings component of the premium payments helps to build cash value over time. As with other savings vehicles, the cash value of whole life policies earns interest, and does so on a tax deferred basis. Also, depending on the policy, the cash value may be withdrawn or taken out in the form of a policy loan for things like college tuition, home improvements or retirement income.

With universal life, policyholders may enjoy some extra flexibility with respect to the premiums, or the face value of the policy. For example, premium payments can be increased, decreased or possibly deferred, while also building cash value over time. Similarly, universal life policyholders may have the option of changing the death benefit of the policy as needs or circumstances change.

Who Needs It and Why?

While life insurance may not be appropriate for everyone, we believe it offers value to many including:

Individuals with a spouse or children that rely on them for financial support. Perhaps the most important benefit of life insurance is its power to replace the income of a family breadwinner in order to help maintain the family’s current lifestyle. When considering how much insurance to carry, consider factors such as current and future income needs, as well as future expenses such as college tuition.

Those seeking to cover the cost of final expenses. While most may choose to avoid thinking about their own passing, some basic planning for final expenses may help one’s heirs to better navigate, financially, during what will likely be a difficult time. With proper planning, life insurance can help cover the cost of final expenses such as funeral costs, outstanding medical bills, or estate taxes, such that surviving family members can avoid spending savings that was planned for other uses.

Individuals with a joint mortgage or other significant debt. For those who have a joint mortgage or other large debt, life insurance may prove invaluable to a surviving borrower. In the absence of coverage, the survivor may find him or herself in the position of having to sell the home or other assets, perhaps at a discount, in order to pay off the outstanding debt.

Business owners. Life insurance can also play a role in helping a business owner to leave his or her estate to the children in a manner that all might consider fair and equitable. For example, a business owner may have children involved in running the family business, as well as others who have chosen to pursue other professions. Logically, the owner may want to leave the business to the children who were involved in its management so that they can continue to derive benefit from it. In order to provide for the children who were not involved in the business, the owner may choose to purchase a life insurance policy that carries a death benefit that’s similar in value to that of the business, and name these children as the beneficiaries on the policy. In this way, all of the children would receive assets of approximately equal value upon the owner’s passing.

Yet another way that life insurance may benefit business owners is in business partnership situations. In order to help ensure that a surviving partner could afford to buy out a partner’s heirs in the event of his or her passing, each of the partners may wish to hold an insurance policy on the life of the other.

As a Tool for Planning

While life insurance is likely thought of, first and foremost, as a vehicle to provide a death benefit, it can also play a role in areas such as charitable giving or long term care planning. For example, if one donates regularly to a favorite charity, the charity could use the donated funds to purchase a life insurance policy on the donor. By purchasing a policy on the donor’s life, the charity is positioned to receive a death benefit that may far exceed the value of the donations received once the donor eventually passes. Similarly, through regular charitable giving, the donor is able to continue to enjoy the tax benefits over the remainder of his or her lifetime.

With respect to long term care planning, life insurance can play a very important role. Traditionally, long term care policies would only pay out a claim if one became ill and needed care. If the individual were to live a long healthy life, and then died suddenly, all of those long term care premiums would be gone. Fortunately, many of today’s permanent life insurance policies give the option of using the death benefit for qualified long term care expenses while the person is living. If the insured needs long term care, the “living benefit” will pay for the care, thereby protecting other assets. If he or she pass away without needing care, the death benefit will be paid to the chosen beneficiary.

While, on the surface, life insurance may seem a fairly simple and straightforward vehicle designed to help provide for one’s heirs when he or she is gone, we believe that when used correctly, it can be a valuable component of one’s overall financial plan. Please contact us if you have questions as to whether life insurance is right for you, or if you have questions about an adequate level of coverage. Similarly, we’re happy to review any existing policies that you may have to help ensure that they are adequately meeting your personal protection needs.

CLICK HERE to request a free Wealth Managment Consultation.

 

 We are here to assist you with your planning and investing, so you can focus on living.
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ROTH vs Traditional IRA’s: What’s the Difference?

ROTH vs Traditional IRA’s: What’s the Difference?

The ROTH after tax and the Traditional Pre-tax method of saving is almost identical except for one variable, which is a person’s income tax. A person’s income tax rate will be a key factor in deciding which avenue to take, pre-tax or not.

How Are Personal Income Tax Rates Determined?

An income tax rate is based on the amount of taxable income a person brings in. The higher the taxable income, the higher the income tax rate. A person’s filling status, meaning if they have dependents or other deductions, will directly affect the tax bracket a person falls in. More income, or higher wages equals a hirer tax bracket.

Traditional or Pretax IRA/401K Method: How does this benefit me in my higher tax bracket?

Traditional or Pretax IRA method of saving pulls the contributions to the retirement fund before taxes. Only when a person pulls from their IRA, do they pay taxes on their money.  This benefits those who want to reduce their income, which in turn reduces their income tax rate. There are a few reasons why a person would choose to deduct their retirement before taxes.

  1. Reducing taxable income by 10 to 15% or more can reduce the amount of income tax a person pays at the end of year to the IRS. This along with charitable deductions and/or dependents can put a person in a lower income tax bracket and reduce their income tax rate. An example of this is explained below:

Let’s say hypothetically, a family brings in $465,000 a year. In the State of Arkansas, that would place them in a tax bracket of 39.6%. This is equivalent to 46 cents per dollar they earn will go to taxes. This family wants to reduce their tax bracket by having their IRA/401k contribution taken out before taxes, along with any other charitable donations and place them in a lower tax bracket that will reduce the total tax amount.

Or

  1. A person may realize that when they retire, they will be in a lower tax bracket, and when they pull from their IRA/401K, it will be at a lower income tax rate. An example of this is explained below:

A person’s W2 shows $30,000 – $3,000 = $27,000 (hypothetically, their tax rate is 20%)

For 20 years a person pulls out $3,000 a month before taxes, which now equals $60,000. Their IRA or 401K, the funds have grown as well to equal $150,000. This person is retired, living on a fixed budget and is in a much lower income tax bracket. Now when the person pulls from their IRA/401k, they are paying the taxed amount that reflects their current income tax bracket.

 ROTH Taxed Method: How does the taxed IRA help me in my tax bracket?

With the ROTH Taxed Method, a person is paying taxes on the contributed amount to their IRA/401K. It would look like this: $30,000 – $3,000 = $30,000. This is because the contribution amount is being taxed along with the rest of taxable earnings. Again, there are multiple reasons why someone would choose the taxed method of savings.

  1. Let’s say hypothetically, a family feels comfortable in their tax bracket of 10, 15 or 20%. They have some children living at home and pay a mortgage for which they receive additional tax credits and donate to charities and/or their religious institution. They know that when they retire, they will be in a higher tax bracket because they will have less deductions. Hopefully, their home will be paid for, they will not have children living at home and they could have other investments that count as income.

In that 20 years, they have paid tax on $60,000. That taxed money has grown as well and now equals $150,000.

According to the IRS, the original amount of $60,000 has already been taxed and now there is a growth or gain of $90,000 that is untaxable. This is because the IRS considers these funds to be co-mingled with the original $60,000, and the funds can be pulled out at any time without any additional tax.

  1. There is a chance that a family’s income could increase or tax laws can change. And at this moment the amount that is being taxed in the allocated tax bracket, they are comfortable with. So, they decide to pay taxes now, instead of later.

Every financial portfolio is unique to each individual situation. If you have more questions regarding the differences between taxed and pre-taxed IRA/401ks or you need some extra guidance with how to save and allocate funds for retirement, please reach out to us.

CLICK HERE to request a free Wealth Managment Consultation.

 

We are here to assist you with your planning and investing, so you can focus on living.
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Contact Hagan Newkirk
Telephone: (501) 823-4637
Email: info@hagan-newkirk.com

Visit our Office:
6325 Ranch Drive
Little Rock, AR 72223

What To Do With Medicare If You Work After 65

What To Do With Medicare If You Work After 65

Many of my financial planning clients are introduced to me as they approach age 65 and have questions related to Medicare, specifically: “What do I do with Medicare if I plan on working past age 65?” In this post, I will go over a few of the more common scenarios that I encounter while working with clients that plan to continue working past age 65, and answer a few of the questions that I tend to field on a regular basis. If you have an individual health insurance policy that is not through an employer, chances are you will not be able to keep that policy when you become eligible for Medicare. This article is for those that have coverage through an employer and have additional decisions that need to be made.

The first step in the decision making process is to understand the insurance that you currently have: What does it cost each month? What are the copay and deductible amounts, and what is your maximum out of pocket exposure?

After reviewing your current coverage, you should speak with your human resources department or benefits coordinator and learn how becoming eligible for Medicare will effect your employer coverage. If you work for a company with less than 20 full time employees, their health plan may have a rule that forces you go onto Medicare and/or reduce your premium if you go onto Medicare.

Now comes the hard part: trying to understand the different parts of Medicare, their costs and coverage, and which ones you need.

Part A: Medicare Part A provides coverage when you are admitted to the hospital for anything other than overnight observation, admitted to a skilled nursing facility, receiving hospice care, and in some cases home health care.  Since there is no premium cost for Part A if you or your spouse has worked and paid Medicare taxes for 40 quarters (10 years), I almost universally recommend that my clients enroll in Medicare Part A at age 65, because it adds a secondary hospitalization payer at no cost. The exception to this is if you wish to continue contributing to a health savings account, which you cannot do if you are enrolled in any part of Medicare. If you are currently drawing Social Security benefits you will automatically be enrolled in Part A at age 65. If you have not started drawing Social Security benefits yet and wish to enroll into Part A, you will not be automatically enrolled and will need to submit an application for benefits to Social Security, either in person at your local SSA office, online, or working with an advisor like myself that offers this service.

Part B: Medicare Part B covers outpatient medical, such as as doctor visits, x-rays, and lab services, as well as outpatient surgery, chemotherapy and radiation. Unlike Part A, which does not have a premium for most people, there is a monthly premium for Part B, which is $134 in 2017. If your income is over certain thresholds you may also pay what is called an income related monthly Medicare adjustment in addition to the standard premium. Like Part A, if you are currently drawing Social Security benefits then you will be automatically enrolled in Part B at age 65 and receive your Medicare card around 3 months prior. If you decide to keep coverage through your employer and delay Part B until retirement, you may do so by signing the back of your Medicare card in the declination section and you will receive a new Medicare card with Part A only. This is a very common method for those working past age 65. Also, like Part A, if you are not yet drawing Social Security benefits you will not be enrolled into Medicare Part B.

Medicare Supplement Insurance: Also called “Medigap” insurance, are polices provided by insurance companies that pay as a secondary payer to Medicare and help with out of pocket costs such as the hospital deductible and outpatient co-insurance. I almost always advise my clients to purchase a Medicare supplement policy if they don’t have secondary insurance from another source. Federal regulations have standardized Medicare Supplement plans in an effort to make comparison shopping between different companies simpler. When comparing different Medicare supplement insurance companies, it is important to review both their current premiums and if the company has an established history of offering their products in your area, and if so, what their rate increases have been.

Medicare Part C: Part C has been around since 2006 as a result of the 2003 Medicare Modernization Act. Better known as Medicare Advantage, these plans are offered by private insurance companies that have contracted with the Center for Medicare services.  Medicare Advantage plans are not a supplemental plan that pay in addition to original Medicare. Medicare advantage plans actually take the place of your original Medicare. While many Medicare Advantage plans may give you an opportunity to lower your monthly premium cost, they may also require you to see doctors in their network, and have higher out of pocket costs if your health were to decline. I always advise my clients to carefully review their options and speak with their healthcare providers before enrolling in a Medicare Advantage plan.

Medicare Part D: Medicare Part D is prescription drug coverage for Medicare beneficiaries offered by private insurance companies. Each plan has a tiered formulary that determines which medications are covered and what the copay is for each covered medication. Monthly premiums vary from company to company, and some plans may have a deductible. Medicare.Gov has a very handy plan finder tool that I use to assist clients that allows you to enter your medications and compare the various plans that are available in your area.

You can find pricing information for Medicare supplement plans, as well as Part C & D plans online, through a local insurance agent that specializes in Medicare products, or contacting your local area agency on aging to compare with your current coverage and make a decision.

If you would like a guide to help you navigate the Medicare process, please complete this contact form or call my office. I have helped hundreds of people through this process and can simplify this transition for you.

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A Quick Guide to Retirement

A Quick Guide to Retirement

  • Your 20’s: Planning Pays off Richly – You’re poorer than you’ll ever be again. If you’re in your 20’s and broke, you are in good company. There is good news! You can begin laying the groundwork for a prosperous future. Getting your act together now means you are putting time on your side. Live as cheaply as you can, avoid the usual financial traps like: spending too much on cars, wardrobe, or eating out. Shovel money into your retirement plan; aim to put aside 12-15% of your gross pay. Consider this: Someone who puts $4,000 a year into retirement accounts starting at 22 can have $1 million by age 62, assuming 8% average annual returns. Wait 10 years to start contributing, and you’d have to put in more than twice as much — $8,800 a year — to reach the same goal.
  • Your 30’s: Don’t be Derailed by Debt – Nine out of 10 people in their 30s are in debt, the highest proportion of any decade. Budget, budget, budget! Did I mention you should have a budget? Control your expenses by knowing where you are spending your money, and aggressively pay off debt.
  • Your 40’s: Make it or Break it – Pay off your debt (excluding the house) and make retirement savings your top goal. Every $1 you fail to set aside now could mean $10 less in retirement income. Meet with an advisor to determine the amount of money you need to save before you retire, then make it happen. Every financial decision from here on out is a big one.
  • Your 50’s: Heads-up – People in their 50s are usually in their peak earning years, and more than half no longer have kids at home. Now is not the time for looking in the rear-view mirror by saying, “I should’ve started saving when I was in my 20’s.” Retirement saving is Priority #1. Review your retirement accounts annually, rebalance to make sure you are taking the appropriate amount of risk.
  • Your 60’s: Last Chance to Get Ready –  Zero in on a retirement date. To know if you can comfortably retire, you’ll need to have a target retirement date, because how much money you’ll need and how much you’ll get (from Social Security and other options) depends on this. But you need to stay flexible, in case the day you’d like to quit working turns out to be too early. Working even a year or two extra can boost your nest egg and increase your retirement income enormously, but there is also no point in hanging around longer than you have to. Review Social Security options. Review your estate plans. Meet with a fee-only planner. The decisions you’re about to make are too important to your future not to get a second opinion. Look for an objective planner who’s experienced with retirement-income calculations.

As always, we are here to help. If you need help planning for your retirement – no matter what age group you are in – do not hesitate to contact us. I would welcome the opportunity to sit down with you and discuss your specific situation.

 

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8 Social Security Questions That You Need To Consider Before Retiring

8 Social Security Questions That You Need To Consider Before Retiring

If you are thinking about retiring in the next few years, chances are you are wondering about
the same things that many other people are at this stage of life. Here are some of the most
frequently asked questions that clients ask me about Social Security Benefits:

How is my monthly benefit amount determined?

Social Security bases your monthly benefit on the amount of FICA taxes that you paid through
out your work history. They take your monthly earnings during the 35 years in which you earned
the most, and index earnings from past years for inflation to calculate your basic benefit,
formally called your primary insurance amount.

How does drawing early effect my monthly benefit?

You can begin drawing benefits as early as age 62, but doing so reduces your monthly benefit to
75% of what it would be if you wait until you reach your full retirement age.

Can I delay my benefits past my full retirement age?

Yes, delaying your benefits past full retirement age earns you delayed retirement credits which
increase your monthly benefit by 8% for each year that you wait past full retirement. The
maximum delayed retirement credits that you can earn is 32% by delaying benefits until age
70.

Can I draw benefits on my spouse’s work history?

If your spouse is currently drawing benefits then you can draw a spousal benefit that provides a
monthly amount up to half of your spouse’s current benefit.

Can I draw benefit off of an ex spouse?

You can draw benefits from an ex spouse if you were married for at least 10 years and are not
currently married. Your ex spouse does not have to be drawing benefits for you to draw ex
spousal benefits.

Will I receive my spouse’s benefit if she passes away?

If your spouse’s monthly benefit was higher than yours, you will begin receiving that higher
amount as a survivor benefit which will replace your monthly benefit.

Can I draw benefits while I am still working?

Yes, however if you work and receive benefits before reaching your full retirement age your
benefits will be reduced by $1 for every $2 that you earn over $16,920. The reduction changes to $1 for every $3 over $44,880 during the calendar year that you will reach full retirement age. There is no income related reduction in benefits after reaching full retirement age.

Will my Social Security benefits be taxed?

Your Social Security benefits may be taxed based on a figure called “combined income”. Your
combined income is your adjusted gross income, plus half of your Social security benefits, plus
a non taxable interests such as earning from municipal bonds. After calculating your combined
income, the IRS may determine that up to 85% of your benefits are taxable.

 

If you need help answering these questions, please, give me a call or fill out this form.

 

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Understanding the WHY Behind Saving & Investing

Understanding the WHY Behind Saving & Investing

Getting it right the first time

Over the past 15 years, it feels like I’ve heard it all. The stories from investors saving for retirement are all over the board. From “Man, if only I would’ve started saving when I got my first job”, to “I’ve never really understood investing, so it’s probably best I just wait until I have time to figure it out.” Then, of course, my favorite, “My retirement plan is to win the lottery!” 

One of the obstacles is that many of us have very little knowledge of investing. It’s not exactly standard curriculum in school, and most of us have little desire, let alone the time, to actually dig in and learn it ourselves. My goal in the next few paragraphs is to give you a basic understanding of saving, investing, and most importantly, WHY we do it.

I heard a saying about 10 years ago that I’ve latched onto ever since. There are three things that we can do with our money. We can SPEND it (nobody needs help with this on, we are experts already). We can SAVE it. We can INVEST it. It’s critical to establish the foundation that saving and investing are two very different things. In short, savings is designed for short-term needs like your emergency fund, a new dishwasher when the old one finally dies, or maybe braces for a child. We SAVE money that we will need to have access to over the short-term, say up to two years. The major concern here is not how much money we can earn, it’s accessibility. We need the money when we need it, and we don’t know when we’ll need it!

Investing, when done right, is done with a focus on the future. We INVEST for the long-term. We invest for things like retirement, kiddos college, etc. It’s noticeable right off the bat that these things are not near-term expenses. They are more than two years away for most of us and that should get us out of a saving mindset and into an investing mindset. What’s the major difference, you ask? We need our long-term money to GROW. And this brings us to a crucial point, and one that you should understand. WHY?

Why should you invest? Think about it. We know that investing involves some degree of risk, so why risk our money? Why do millions of seemingly same people in this world take risks with their hard-earned money? What’s your gut reaction? They could lose money, right? so why do they invest?

I’ve been asking this question for years to literally thousands of people, and I usually get an answer like: “So my money will grow.” Why do you need your money to grow? “So I’ll have more of it.” But WHY do you need more money? “So I’ll have more of it.” But WHY do you need more money? “So I will have more money to spend.” Why do you need more money to spend? “So I can quit working and live the same lifestyle or maybe even improve my lifestyle.” This is about the extent of our understanding as to WHY we invest our money. A critical reason we invest is a dirty little word called INFLATION. We have to invest in order to keep up. Inflation is the cost of goods (cost of living) getting more expensive. If our money doesn’t grow because we don’t want to take risks, we are effectively ensuring the very thing we are afraid of. We’ll go broke slowly. Think about it, according to cars.com, the number one selling car in 1985 was a Chevrolet Cavalier (it was ugly!). Brand new, it cost $9,005. The number one selling car in 2016 was the Toyota Camry. Brand new, it cost $24,840.

So, if you had $9,000 in 1985 and “saved” it, did you lose money? Technically, no. But, you did lose purchasing power. That’s WHY we invest. In my opinion, you can’t afford NOT to.

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