Does the 4% Rule Still Apply for Retirement

In the past, experts said that in the first year of retirement withdraw 4% of your retirement and increase from there each year based on inflation. But the question now is, is this still a worthy rule. Let’s look at the fact.

Right off I will give you two reasons why this may not work for you:

  1. Many have very low balances in their retirement fund.
  2. Low interest rate could cause the saving to deplete too quickly.

According to recent data, the average 65-74-year-old only has about $140,000 in their retirement account. If you apply the 4% rule, then they are only withdrawing $5,600 per year. This is significantly lower than they would normally live on and makes them dependent on Social Security or pensions.

The biggest portion of your retirement saving is most likely invested in less volatile investments such as government bonds or corporate bonds, that only yield about 3% returns. If you would use the 4% rule to withdraw then the money would not replenish quickly enough to last you the remainder of your life.

So how can the 4% rule apply to retirement if most people do not have enough money to maintain the withdrawal rate. We all know that the 4% rule is not perfect, but is it a starting point. It can also help you determine how much money you want to save before retirement. If you look at what 4% of $100,000 would be that is only $4,000 per year. Which is not enough to live on without supplemental income. It also shows just how much you will need to save to continue living life the way you have gotten used to living.

So is there something better than the 4% rule? Sure, but they are even scarier than the 4%. If you want to have around $50,000 a year without supplemental income, then you will have to determine what the withdrawal rate will be and save according. This could mean having to save up to or more than 1 million before retirement. This can be a scary number for people who have not done a lot to save their money over the years. Having a good financial advisor is key to making sure you are where you want to be when you retire.


Mental Tricks to Make More Money

Ok, so it is not easy becoming rich, but it is more than just bank accounts that separate the rich from everyone else. It is their think process also. For many rich, making money requires a different type of thinking; it requires you to believe that you can make money.

So how do rich people think differently? It is as simple of believing in themselves. According to the article “6 Psychological Tricks Rich People Use to Make More Money,” by Kathleen Elkins, there are six mental trick that rich people used to give themselves the green light to earn more money.

  1. They tell themselves there is no shortage of money, even if they don’t have enough at the time. People who are rich are not afraid to use other people’s money to make them more money. Many times the rich have great, expensive ideas that need financial backing to make them realized, and in the process, making them profitable.
  2. They set their expectations unreasonably high. Middle class set their expectation low and reasonable, but the rich set high expectations and they don’t take failure as the end. The ambitious goals give them something to work towards and risks to overcome.
  3. They think money is a game. Most thinks that life and money are games. Business is the vessel for the game. They chase the next big deal and court the next big financial advantage. The excitement is the game. Playing games makes it fun while pushing them towards higher levels of expectations.
  4. They make money their friend. Money is a tangible friend that they worry about and have fun with. It solves their problems and create the life that they envision.
  5. They block their fear. Many of the rich operate on a different level of consciousness where fear is not something they think about because it does not exist. They think outside their comfort zone and explore the unknown because that is where the deals are made and where the excitement is found.
  6. They believe that getting rich is natural. The middle class struggles because they expect to struggle. The rich or at least the ones on their way to being rich have the one single minded drive to believe that becoming rich is a wish fulfillment along with happiness and success.

So if you want to become rich, all it takes is a change in mindset. Stepping out of your comfort zone and into the unknown. Shut down your fear and take a leap.


The Nanny Tax

Like many families, when the kids are out of school for the summer you need someone to watch them while you are at work. This small act to ensure the safety of our children may come back to get us in the end. Just because we send them back to school does not mean we can avoid paying the “Nanny Tax.”

So what is the “Nanny Tax”? According to the IRS, if you pay anyone $2000 or more they are considered an employee. That means if you hire a nanny or caregiver for the summer they become an employee of the family. It makes you responsible for withholding and pay taxes on the wages you pay the caregiver over the summer. If it is over $2000, then Social Security and Medicare taxes. You are also responsible for matching the amount of Social Security and Medicare as the employer. This makes a simple task for parents into something complicated and unwanted.

There is another threshold we have to look at when it comes to having employees, and that is the $1000 threshold. At this point, as an employer, you are required to pay federal and state unemployment taxes.

Now, even though that is all the taxes you pay, it has a different time line than personal income taxes. Employer taxes are due throughout the year. Many time they are paid at the end of each calendar quarter.

There is some good news. If you pay the taxes and follow the rules, the IRS does reward you with tax breaks that may offset the cost. You can take advantage of dependent care accounts, which is set up like a flexible spending account, or the childcare tax credit. Both of which sometimes gives you more back than what you paid. The only thing you need to be able to take advantage of those tax breaks is the nanny/caregivers Social Security number, address, and send them a W-2 form at the end of the year.


Saying No to a Networking Request

In today’s world of networking and social media to promote ourselves and our businesses, it can be tough to decide how to field requests that come in for your time and attention. And if you are successful, you are getting requests all the time. They want a chance to pick you brain, or take you out to coffee. These people want your time, attention, and probably for you to invest in something of theirs. So how do you evaluate these requests and weed through the good and the bad? How important is it to say no?

When a request comes in it can be flattering, or at least it was when you were just beginning your career. Now it can cause several things to happen, including reduce your productivity, take up valuable time you would spend with clients, and keep you from staying on top of your contacts you need to see regularly.

So how does this work. Well, there is many grey areas to accepting networking requests. You have close friends that you will always say yes to, and then there are the ones you do not know at all that are an automatic no, but what about all the ones in the middle? These are the ones that you will have to modify how to evaluate whether you accept the request or not.

Some good ways to do this are to:

  • Ask for more information. This can cut down on aimless conversations. This is also a good way to weed out anyone who has contacted you because they thought it was a good idea, but don’t really have another reason to contact you. The best thing to do is write back to them and ask how you can help them or if they can give you more specifics. This will cut the requests down significantly because most people will not write back.
  • Direct them to Resources. Once you understand what they are wanting by getting more information, you can provide them with more information by directing them to your many resources. Many will begin to ask for a private call or meeting, but you need to make them work for it. Direct them to other resources that are already public and if they are highly motivated they will have more questions and get back to you, otherwise you narrow down the inquirers.
  • Invite them to a group gathering. What if you are interested in meeting with someone, but don’t have time to do a one-on-one? A group gathering is the solution. Invite them to a group gathering where you can connect to multiple people at a time. It will also give them a chance to network with other people interested in the same thing they are, and maybe they will make new connections.
  • Just say no. Sometimes the easiest way to minimize your connection is to just say no, and not even a modified no, just no. There could be many reasons for this, including not enough time, you have minimal connection with the person, or they have proven themselves to be entitled to you time. Make the no firm, but respectful. They may be mad, but don’t let them fault you for your promptness or manners.

Despite our ability to be readily available to people does not mean you have to cater to their needs and wants. Be cautious of people just wanting to take your time away from you. Make sure you make them prove they are worthy of your time and energy. Be gracious and stay focused on your priorties.


Change to Overtime Rules

Beginning December 1, 2016 there is a change in how overtime is paid to “white collar” workers. While this does not apply to anyone who is eligible for overtime now, including hourly workers, this does apply to workers who have not had a chance for overtime in the past. So let’s look at the changes and how they make effect your business.

  1. White-collared workers who earn at least $913 per week ($47,476 annually) will be disqualified from overtime pay, which is time-and-a-half on excess of a 40-hour work week.
  2. Nondiscretionary bonuses can satisfy up to 10% of this new salary requirement as long as they are paid at least quarterly.
  3. Highly compensated employees mu be paid at least $134,004 annually to be disqualified from overtime pay.
  4. Automatic updated to these salary levels will be updated every three years beginning on January 1, 2020.

So what does this all mean. This means that some companies are scrambling to figure out how to comply with the new rules. Many of them have not budgeted for this significant payroll increase and cannot afford the increase. This is much like cost-of-living increases and will be adjusted over time impacting employees’ salaries and companies’ budgets.

What is the plan to combat this change, and how are companies dealing with the increases? The following are some immediate steps companies can take to prepare for the change:

  1. Assess job description. Identify which exempt position are close to the new salary level and which position should be reclassified as non-exempt. Move people as needed.
  2. Assess and Choose. There are several options for employers to fix the situation: 1) raise exempt employees to the new levels to pay no overtime. 2) Leave exempt employees’ salaries below the new levels and pay time-an-a-half for overtime worked. 3) Limit workers’ hours to 40 per week by reorganizing, adjusting schedules, and hiring more people. 4) Use a combination from the suggestions that work for you and your company.
  3. Introduce Time-Keeping. For employees not use to keeping time while they are on the job, you will have to develop, implement, and train them on keeping track of their time. There will be a learning curve, so ensure you give yourself enough time for the adoption.
  4. You need to keep your employees up to date with all the changes. Keeping them in the loop will ensure an easy transition.
  5. Get help. Many of the rules that are changing are also complicated. It is best to seek professional advice to help keep the cost down and make sure you don’t make a costly mistake.

This transition will take time and it is important to get it right. Mistakes can be costly and your business cannot afford to take penalties if something goes wrong. Stat now, start slow and create a plan to ensure the transition is smooth and easy.


Bills to Pay Before You Retire

Ok, so we have talked a lot about retirement. Maybe because it is wishful thinking on my part, but it is also a really important time and transition in life. So we know we need to start saving early if we want to maintain our current lifestyle, or be able to travel (I would love to be able to travel). There are a million things we have to do to get ready to retire, but one of the most important things is to pay off our debts. There are three debts that need to be paid off before we retire, and with 65.4% of households, with a head of house 55 or older, having held debt since 2013, there is a significant number who go into retirement with debts lingering over them.

So what are the debts we need to take care of, and how do you get it done before we retire? Here are three debts to tackle and some advice on how to accomplish the task.

  • Unsecured debt: This includes credit cards or any other lines of credit you make have. This is a tough one because much of our lives revolve around credit, but it is important to not have credit card debt. According to Credit Karma’s calculator, if you have $10,000 on a credit card with 12% interest and are only making $150 payments, then you will pay almost $6,600 in interest. Just think about what they money could have been used for. To help tame this debt, start by evaluating you credit cards. Consolidate the amount from the highest-interest. Many credit card companies offer zero percent interest for 12 months with balance transfers. This is a good way to work your debt down to a manageable amount because the payment goes direct to the principal instead of mainly interest.
  • Student loan debt: We all want what is best for our children, but financing their education is not always what is best for us. We had to finance our own education. Let them finance their own education. If you decide to take on some responsibility to help your child with college, the best advice is to keep saving for retirement, and repay the loans as soon as they come due. Like any repayment, repay more than to minimum. Once your child graduates and get a job, have them contribute to the payback. To minimize the amount you start with, encourage them to maintain good grade, and get a good score on the ACT/SAT to be eligible for scholarships. They should also only take the classes they need to graduate, and if they cannot maintain grade then they should have to pay for the classes they fail. Do not shoulder this burden if you cannot afford it.
  • Mortgage debt: Nearly 33% of Americans’ total expenditure in 2015 went to housing. While mortgage debt is considered “good” debt, it is still debt. Most of the time when you retire, your kids are already out of the home, and your house is the last tax shelter you have. You may want to take advantage of lower interest rate and refinance, which will save on interest and get you a higher return in your investment.

If you are close to retirement and having trouble getting out from under your debt, then you may just have to work longer. While this may not be the option you wanted, it may work out for you in the long run. People who delay their retirement until the age 65 or later, can get significantly more money from Social Security then those that opt to retire at 62. And if you delay retirement until closer to 70, the amount just keeps going up.


Trimming Taxes into Retirement

Retirement is the time for many things. You are free to explore your passions, travel, spend more time with family. It is also time to reevaluate your financial situations. By cutting your tax bill, you essentially end up with more money to spend on yourself during retirement.

When you retire, you stop collecting paychecks. This means you are living on other funds you have spent your life saving. There is a good chance that this change in income will put you in a lower tax bracket then what you were in when you were working. Being in a lower tax bracket means lower taxes. This can be a nice benefit to retirement.

While this is something that can happen naturally, there are other ways to actively save on your taxes into your retirement. So let’s look at somethings you can do to reduce your taxes.

Switch to a Roth

Many people have a 401(k) or a traditional IRA. A Roth can help reduce your taxable income since no federal taxes are due on Roth withdrawals. This is not the case for the other tax-deferred accounts, but the conversion to a Roth can take several years to accomplish.

When converting to a Roth stretch it out over several years, and only convert enough so it will not put you into a higher tax bracket. If you are under 65 and buying subsidized health insurance, a conversion is less attractive because converting will increase your income and decrease your subsidy.

Get a Leg Up

Since the bulk of your savings is in a tax-deferred account, a Roth conversion might not make since for you since you will need funds outside your 401(k) or traditional IRA to pay taxes on the conversion. Instead of converting, you might take distributions from you 401(k) or IRA while still in your sixties. You might save money by starting the withdrawals earlier and in a lower tax bracket as long as you are over the age of 59 ½ to avoid the 10% penalty you are subjected to in most cases.

Sell Some Stock

If you are in the 15% federal tax bracket or lower, then you do not owe capital gains taxes on the sale of securities held form more than a year. If you are in the higher tax bracket, then you owe at least 15% on the sale of any securities. So dropping to a lower tax bracket may give you the chance to sell off some stocks, especially if they have gone up in value and no longer fit your portfolio.

Remember circumstances change and so do the rules governing taxes, so revisit these strategies often and reevaluate you finances to ensure you are still saving money and it fits your current lifestyle.


Risk and Return

Millions of people invest in in diverse portfolios, but do they understand the difference of risk and return. Many want better portfolio performance with less risk, but is it possible? Yes, it is, but it also depends on how we measure risk and return.

Of the two, return is the easily measured. We calculate the average annualized return over multiyear/rolling time periods. You can see the growth and it is represented by a growth of $10,000 over various timeframes.

If we look at a diversified seven-asset portfolio consisting of US stock, small-cap US stock, non-US stock, real estate, commodities, US bonds and cash all held in equal 14.29% allocations, then the client can expect a 46-year average annualized return of 9.78% if they rebalance as needed. This is safe and the client can reap the rewards in retirement, but what are the other options.

There is the large-cap US stock (the S&P 500) investment. In the same 46-year period where the portfolio consisted of mainly large-cap US stocks, the return investment was higher than the broadly diverse model that included almost 30% fixed income.

While the returns over the long run are significant, many clients have a short term mind set. They expect to make millions in just a few short years, but when comparing an all-stock model to a diversified model the gap shrinks considerably making the diversified model more appealing.

Now what about risk? Risk is a bit trickier to measure. It is complicated and messy. The traditional method is to calculate the standard deviation of return of investment. For many clients is does not mean anything. Some may know that a higher deviation is preferred, but beyond that it means nothing. They only way to make the number useful is by comparison.


Closing the Loophole on Family Limited Partnership

In the past few decades, estate planners have found ways to reduce the amount of taxes paid when transferring marketable assets into trusts. The estate planners have used entities such as family limited partnerships (FLP) or family limited liability companies (FLLC). The marketable assets are held within the FLP or FLLC and then transferred to trusts for the taxpayer’s children. This in essence discounts the marketability of the gifts by 25% to 40%.

Since the IRS is not getting what they deem their fair share, this strategy has been labeled as abusive. With no effective legislation to control the use of the FLP and FLLC, the Treasury has proposed regulations aimed at curbing these transfers. While the IRS has recently conceded that there should be some discount applicable to the transfer of the family entity, they argue over the size of the discount.

These regulations have been expected over the last few years, and are getting closer to being finalized, many advisors are recommending that the transfers of those that may be affected by the change get done early before the rules become final.

While the IRS hopes the new regulations will disallow the discounts on value for FLPs and similar entities from being controlled by a single family or members of a single family with a small number of outsiders added for the purpose of avoiding Section 2704, the taxpayers that this will effect are hoping that is will not be retroactive.

The Treasury has allowed a generous window to provide the opportunities for families to use the entities until the end of the year. There is a 90-day comment period with comments due by November 2, 2016 and a hearing scheduled for December 1, 2016. The final regulations will not take effect until the end of December giving advisors time to set up an FLP or FLLC and get the benefits of the discounts like they would today. The window is closing and now is the time to take advantage of the opportunity.


Increasing Productivity

Everyone is busy. Some of us seem busier than others, but there may be a way to help increase your productivity. Everyday there is more “to-dos” thrown our way that we have to manage while still getting to everything else. So how do you manage everything there is to do in only the short 24 hours we are given. The answer is not more hours, but using those hours more effectively. This does not require you to work more hours or give up family time, it just requires you to find small ways to increase your productivity in the hours you already work.

Tip 1: It is okay to say “no”

I know in the world where “yes” is king, it is hard to utter the two letters that make people gasp in horror, but it is a word that needs to be uttered more often. Don’t be afraid to say “no” in a
yes” world.

So how do you say “no” when someone asks you to do something. First, evaluate the situation or task. Ask yourself, “Am I the right person,” “Can someone else do this task instead,” “Do the task even need to be done?” Many of us are people pleasers and “no” is a hard thing to say, but it has to be done. Even when “no” is not feasible to say (everyone has bosses who ask us to do the impossible), know your goals for both your business and personal life, and use “no” when it I most valuable to you.

Tip 2: Stay Organized

Life is complicated and messy. Juggling all the commitments take either more than two arms to keep the balls in the air or a very sophisticated reminder system. This is where a good calendar system comes into play. Outlook, Google Calendar, etc. are calendars that will sync to computers, phones, and tablets. Schedule everything that is important, including doctor appointments, personal obligations, etc. You may even need to schedule work time before a deadline to make sure you have enough time to commit to the task.

Set up reminders. Many calendars allow you to set us recurring reminders to events that need to be set weekly, monthly, semi-yearly, yearly, etc. This can be helpful for birthdays, anniversaries, doctor appointments, or anything you need a reminder for. Many of the calendars also have color coding for the reminders. This will help you organize the tasks in to categories, and even critical events.

Tip 3: Take Breaks

There are times during the day when you are less productive than other. In those times, take a break, breathe, and regroup. When you are rested and refreshed you are more productive and can think clearly. Find the time when your productivity slips and use that time to watch a silly movie, take a nap, spend time with your family, or just take a brain break. It will boost your productivity and all your brain to recharge. Who knows you may even come up with a few more things you need to do.