Over the last week, my home has become a construction zone due to mold remediation that was required in our crawlspace and attic. Our home was built in 2018 so this shouldn’t have been an issue. What we discovered is that when the builder was encapsulating the crawlspace, he did it 80-90% of the way. He didn’t do those last few steps which would have ensured that it was a safe environment and mold wouldn’t grow.
As frustrating as this has been as a homeowner, my mind has been drawn to the parallels between this situation and helping our clients plan for and create the future they want:
- The builder wasn’t disciplined enough to complete the last 10-20% of the encapsulation. If you’re going to be successful financially (and you can define success however you want), you don’t have to be the smartest person in the room or pick the next hot stock that’s going to deliver incredibly high returns. The predominant driver of our ability to achieve our financial goals rests on our ability to stay disciplined. Are we spending less than we make and saving for the future? Are we keeping up with the Joneses and buying the more expensive car or larger home? Or are we content with what we have? Are we sticking to our investment strategy when a global pandemic strikes or do we panic and make choices that will hurt us in the long run?
- The cost of remediating the mold at our home is multiples of what it would have cost if it would have been done right the first time. This is true in just about every area of financial planning. For example, when it comes to estate planning, I always tell clients you can spend the money to do it right now or your heirs will spend significantly more when you pass to fix the problems then.
- It would have taken much less time to do it right the first time. When it comes to investing, saving as early as possible is important to let compounding work for you. For example, if you save $6,000/year from age 25-65 and earn an 8% average annual rate of return, you could have $1.55M saved for retirement. However, if you wait and begin saving that same $6,000/year at age 35 and earn an 8% average annual rate of return, you’d only have $679K saved for retirement. The extra $60,000 that was saved in the first 10 years does make a difference but the vast majority comes from those extra 10 years of compounding growth.
With working from home and virtual learning for kids, it’s been so easy to put off something that’s important but not urgent like working on our budget to be able to increase our savings, getting the right life insurance coverage in place to protect our family, or updating our estate plan. The right time is now. Waiting can always have unintended consequences. Please don’t hesitate to reach out as we can help with many of these or get you to the right person.
If you’re like most people in the United States, you’ve done most if not all of your retirement savings in a pre-tax retirement account like your 401(k) at work or a Traditional IRA account. The beauty of these accounts is that you pay less taxes today because the amount you save is typically not included in your income that year.
One of the downsides is every dollar you take out of these accounts in the future will be taxed as income. Let’s assume you’ve saved $500,000 for retirement in one of these accounts. If your combined tax rate between Federal and State taxes ends up being 30%, then your future tax bill is going to be $150,000. In reality, you don’t have $500,000 to fund your retirement – you have $350,000.
What Can I Do About This?
When we’re working with our clients to prepare for retirement, we want to make sure you have money in all 3 of the different tax buckets:
- Pre-tax money like your 401(k) or Traditional IRA
- Tax-free money like a Roth 401(k) or Roth IRA
- After-tax money like an individual or joint investment account
By having three different tax sources, that gives us multiple levers to pull as we work to keep your taxes as low as possible in retirement. For the rest of this conversation, I’m going to focus on #2 – the Roth option.
You can increase your Roth savings by making contributions annually to your retirement accounts or by converting some of the existing balance from your pre-tax retirement account. This is called a Roth IRA Conversion. You will be required to pay income taxes today on the amount you convert, but then it will grow tax-free and come out tax-free in retirement.
Income tax rates in 2020 are near historical lows (1) so the Roth IRA Conversion is a strategy we are using regularly with our clients today. If tax rates end up being higher in the future, then it would be better to pay the tax today at a lower rate and get it tax-free during retirement. So often when people are looking at ‘beating’ the IRS by paying less taxes, they focus solely on the current year. If you really want to beat the IRS, it’s a 20-30 year game by planning ahead. That’s what we’re here to do and proper tax planning can save you tens of thousands of dollars in taxes during your retirement.
Please contact us if you’d like to discuss whether this is a financial strategy that would benefit your retirement plan.
I recently spoke with a client and they asked whether they should freeze their credit. They just purchased a new home and didn’t expect any major purchases in the next few years that would require credit. The answer I gave them is the same advice I would give to everybody – yes, I would definitely recommend freezing your credit!
Why Freeze Your Credit?
It’s currently estimated that cybercrime will cost the world $6 trillion annually by 2021(1). It feels like every week there’s news of a new data breach where hackers try to get our personal information. By freezing your credit, it will protect your credit and not allow somebody to open an account in your name. It’s as simple as that.
Adding a freeze to your credit will not affect your credit score and in NC, there’s no cost. In some states there is a cost but you’ll be aware of that before it occurs. From my perspective, a small fee like $10 is well worth the peace of mind.
Credit freezes are not perfect and are not always 100% effective, but they’re the first step to protecting your credit.
How Do I Freeze My Credit?
You will need to freeze your credit with all three of the major credit bureaus to be as protected as possible. Here are links to their websites that will walk you through adding a freeze:
- Experian – Security Freeze
- Equifax –Personal Credit Report Services Security Freeze
- TransUnion –Credit Freeze
When you’re ready to make your next major purchase and need access to your credit, you will go back to each of these companies and temporarily lift your credit for a few days. It can seem a bit daunting, but it only takes a few minutes to lift your credit.
This is an easy step to protect yourself from cybersecurity so we highly recommend setting it up.
Are you one of the 87% of Americans who are not able to deduct your charitable contributions on your tax return?(1) When I’ve asked this question to most of our clients, their response usually is “No – I gave my charitable contributions to my accountant.” However, they’ve failed to actually review their tax return or discuss with their accountant whether they are able to deduct their charitable contributions.
I’ll try to keep this brief to not bore you with tax details, but this goes back to the Tax Cuts and Jobs Act of 2017. This Act increased the standard deduction from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for married couples. For example, if a married couple has $18,000 in itemized deductions, they would have itemized in 2017. In 2018-2019, they save more in taxes by taking the standard deduction but they aren’t able to deduct their charitable contributions. That’s where Qualified Charitable Distributions come in (QCD).
What Is a QCD?
A qualified charitable distribution is allowed for those who are over age 70 1/2. Rather than withdrawing funds from your retirement account and placing the proceeds in your bank account and then sending a donation to your charity, you withdraw funds and send them DIRECTLY to the charity you want to support. When this is done correctly, the amount you withdraw never shows up on your tax and saves you tax dollars.
Most people’s combined tax bracket between Federal and State taxes is 15-40%. For a $10,000 charitable contribution, this could save you $1,500-4,000 in taxes! The maximum QCD you can do annually is $100,000.
Should I Do a QCD if I Itemize My Tax Deductions?
The short answer is yes! By doing a QCD, your income is lower which leads to a lower Adjusted Gross Income (AGI) on your tax return. Your AGI is used to determine how much of your Social Security benefit is taxable and what your Medicare premiums are. A QCD could keep you in a lower bracket and save you thousands more in taxes and additional Medicare premiums.
Please click on this link to access a flowchart that walks you through all of the questions you should ask to ensure you’re eligible to make a QCD.
Welcome to the Franklin Watkins Financial Group blog! Our purpose is share helpful ideas and our thoughts on a wide range of financial topics. Some days we’ll focus on education and other days it will be on strategies to help you achieve your financial goals.
I want to start by answering a question I’ve been receiving regularly over the last few months. What is values based investing and how do we incorporate it into a portfolio? With all that’s happening in the world, it’s no surprise more people are asking these questions.
At its core, values based investing is where we overlay certain screens to only invest in companies that align with your values and worldview. The two most common type of screens we see are:
- Religious Screens
- Socially Responsible Investing or ESG Screens
Religious screens or faith based investing is driven by the religious beliefs of Christians, Catholics, or Muslims. The investment options for religious screens have been very limited in the past but are improving.
Where we are seeing significant growth is in the Socially Responsible Investing (SRI) screened portfolios. That market has grown to $12T in investments as of the end of 20181. Many people also call this ESG which stands for Environmental, Social, and Governance. Here are a few examples of what they screen for in each category:
- Environmental – carbon footprint, green products, recycling and safe disposal practices, and use of renewable energy.
- Social – treatment of employees, safety practices, ethical supply chain, and being involved in social justice issues.
- Governance – diversity of the board of directors and management team, transparency in business and accounting practices, history of lawsuits, and excessive executive compensation.
Another tool that’s used is both positive and negative screens. For example, if we’re using a negative screen we would exclude Exxon because of their use of oil. With a positive screen, we are looking for companies who are actively involved in that category. A good example of this is Nike which has vowed to use 100% renewable energy by 2025 and be carbon neutral by 20302.
Will these values based screens affect my investment performance?
This is a question that always comes up in our discussions! Ten years ago, I definitely would have said that using these screens will impact your portfolio performance due to the investment performance we saw. I still believe this will be the case moving forward with the religious screens because the choices are fairly limited.
With SRI/ESG investing, I do not believe investment performance will be affected moving forward. As I mentioned earlier, trillions of dollars are flowing to these investments which is causing more investment firms to offer these screens and put their best investment teams on them. Secondly, companies don’t want to be left out so they are improving their business practices which means the pool of investments we can choose from is much larger.
If this is something you’d like to learn more about, please don’t hesitate to contact us and we can help you decide what options will work for your unique financial situation.
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